Why Gladstone Capital (GLAD) Is an Undervalued High-Yield BDC to Buy at a Double Discount

In the current high-interest-rate environment, business development companies (BDCs) have emerged as compelling income vehicles, offering investors exposure to private credit markets while maintaining attractive dividend yields. Among these, Gladstone Capital Corporation (GLAD) stands out as a rare opportunity: a BDC trading at a modest net asset value (NAV) discount while delivering a robust yield that outpaces both its peers and broader fixed-income benchmarks. This article argues that GLAD is an undervalued high-yield BDC to buy at a "double discount"-a term describing its favorable price-to-NAV ratio and its superior income generation relative to the sector.

BDCs in 2025: A Sector at a Crossroads

The BDC sector has faced significant valuation compression in 2025, with the average NAV discount widening to 16-17% as of late 2025. This reflects broader market skepticism about private credit risk and macroeconomic uncertainties, particularly as central banks have signaled potential rate cuts. For context, large-cap BDCs like First Trust Small Cap Value (FSK) and Goldman Sachs BDC (GSBD) trade at 32% and 25% discounts, respectively. These wide discounts mirror those seen during past market stress periods, such as 2008–09 and 2015–16. However, not all BDCs are equally affected. Some, like Gladstone Capital, appear to be trading at a relative bargain.

GLAD's Attractive Valuation Metrics

Gladstone Capital's current NAV discount of -2.01% as of September 30, 2025, is starkly out of step with the sector's average. While peers trade at double-digit discounts, GLAD's shares are priced at 0.98x NAV, indicating a mere 2% undervaluation. This divergence is striking, especially given GLAD's strong portfolio performance. Over the past five years, the company has generated a $6.71 per-share increase in NAV, raising its net asset value per common share to $21.34 as of September 30, 2025. This 0.4% quarterly NAV increase from June 30, 2025, further underscores its resilience.

The "double discount" argument hinges on GLAD's combination of a narrow NAV discount and a high dividend yield. The company's 2025 dividend yield of 8.563% is well above the sector's 9-11% range and significantly higher than the 4-5% yields of most corporate bonds. Historically, GLAD's dividend yield has averaged 9.14% over the past five years, with a low of 6.92% in 2021 and a high of 11.35% in 2025. This consistency, despite seven dividend increases since 2021, highlights its ability to sustain payouts even amid shifting interest rates.

A Yield That Outpaces the Sector

GLAD's 8.6% yield in 2025 is not an outlier but a strategic advantage. While some BDCs, like Oxford Square Capital, offer yields as high as 22.95%, these often come with wider NAV discounts and higher risk. GLAD, by contrast, balances income generation with relative stability. Its monthly dividend of $0.15 per share provides predictable cash flow, a critical feature for income-focused investors.

The company's recent 9.1% reduction in its common distribution to align with current investment yields has been met with mixed reactions. However, this adjustment reflects prudent management rather than a sign of distress. By matching payouts to portfolio performance, GLAD has maintained a coverage ratio of over 1.0x in recent quarters, ensuring sustainability.

Risks and Considerations

Critics may argue that GLAD's modest NAV discount (-2.01%) suggests limited upside potential compared to deeply discounted peers. However, this perspective overlooks GLAD's strong fundamentals. Its portfolio of senior secured loans and equity investments has shown resilience, with a 0.4% quarterly NAV increase in Q3 2025. Additionally, the company's 7.25% total payout growth since 2021 demonstrates its ability to reward shareholders even in a challenging rate environment.

That said, BDCs remain sensitive to interest rate cycles. A potential easing in 2026 could pressure yields, but GLAD's floating-rate structures and diversified portfolio position it to weather such shifts better than many peers.

Conclusion: A Double Discount Opportunity

Gladstone Capital's combination of a narrow NAV discount and a high dividend yield creates a rare "double discount" scenario. While the broader BDC sector trades at 16-17% discounts, GLAD's -2.01% discount suggests the market is underappreciating its strong portfolio performance and income potential. For investors seeking a high-yield BDC with downside protection and consistent cash flow, GLAD offers an attractive entry point. As the sector navigates macroeconomic uncertainties, GLAD's disciplined approach and resilient portfolio make it a standout candidate for long-term outperformance.