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Like dividends? A little outfit called Hercules Capital (NYSE: HTGC) dishes them out in a big way. Shares of this business development company boast a trailing dividend yield of a little over 8%, in fact, and that's based on just its ordinary quarterly payout. Adding its supplemental dividend to the mix cranks the trailing-12-month yield up to nearly 10%. Not bad.

Before plowing into a new stake in this name based on nothing other than its big yield, however, you might want to dig deeper into the company's details. Hercules Capital may be a great dividend stock for some income-minded investors, but it's a lousy one for others.

How Hercules Capital is different... and better

As a business development company, or BDC, Hercules Capital provides capital to up-and-coming companies that don't want to tap public markets but also don't qualify for a loan from a conventional or corporate bank. Sometimes these funds are offered in exchange for equity in the company in question. More often than not, however, these are loans made at relatively high interest rates. Hercules says the effective interest yield on its loan portfolio is just under 15%.

Shareholders obviously aren't collecting the entirety of these interest payments in the form of dividends. Hercules also holds some equity investments that don't pay any interest, after all, and like other BDCs it has operating expenses of its own to cover.

Even by BDC standards, though, Hercules Capital is compellingly unique in a couple of key ways. One is the companies it chooses to work with.

Hercules specializes in life sciences, technology, software, and renewable energy -- growth industries with long-term staying power. This narrow focus means it's better able to judge a particular company's potential to grow and repay a loan.

And the other unique attribute? The interest rates on most of its outstanding loans are floating-rate loans, meaning they rise and fall with the prevailing rates at any given time. While these terms are ultimately proving more expensive for its borrowers, the dynamic also prevents Hercules' bottom line from being pinched by the sort of interest rate volatility we've seen over the course of the past couple of year.

Who it isn't for

It sounds great, so why wouldn't income-seeking investors want to go ahead and plug into this high-yielding ticker? Because there are some prospective downsides.

Chief among them is the lack of capital appreciation.

Although the equity component of Hercules Capital's portfolio facilitates some net gains in the value of its shares, these gains typically don't keep pace with the benchmark S&P 500. Indeed, its average annual capital gain over the course of nearly the past couple of decades is just a little over 2%. Most of this stock's total return comes from its dividend. So, if you're looking for at least decent capital appreciation in exchange for a little less dividend income, there are better options out there.

At the same time, if you're looking for consistent dividend growth, Hercules Capital may not be able to offer it either.

Don't misunderstand. Whereas its ordinary quarterly dividends are consistent and have at least grown steadily since 2021, its supplemental dividend payments are all over the map. These supplemental dividends are also not guaranteed to continue being paid at all.

Data source: Hercules Capital. Chart by author. Figures are per share.

Shareholders who can remember these added payouts are bonuses that can't be counted on should be able to handle things if they change. Income investors who learn to count on these bonuses, however, may suffer a bit of shock should interest rates fall and reduce Hercules' ability to be as generous as it's being now.

The kicker: Much of Hercules Capital's recent success (and growth) can be chalked up to the recent environment marked by rising interest rates, stimulus-driven economic strength, lots of start-up companies in need of capital, and a relatively small number of lenders of its kind willing to make these sorts of loans. All of these attributes are subject to change, however, posing a threat to Hercules' dividend-supporting profitability. If you're not interested in keeping your finger on the pulse of these four forces, you may be better off with more familiar, proven dividend payers.

Worth the risk for certain income-seeking investors

All these risks and the stock's usual volatility aside, Hercules Capital is a compelling investment prospect even if income isn't your sole goal at this time.

Think about it. Although the current dividend yield of just over 8% is higher than usual for this name, newcomers would be plugging into a stock that's paying consistent ordinary quarterly dividends. Your effective yield paired with the stock's modest long-term price-growth track record should still put you in the ballpark of an annualized rate of return of 10%, which is in line with the S&P 500's typical yearly return.

Then there's the more philosophical reason you might want to own a stake in Hercules Capital: The private lending market is quickly becoming a desirable alternative to conventional stocks.

And it's not just investors wary of overvalued and overly volatile equities finding fair risk-versus-reward in business development companies. Would-be borrowers are increasingly embracing these alternative lenders too. In this vein, industry research firm Preqin believes the global private credit market is set to nearly double in size between 2022 and 2028.

This growing demand should help Hercules Capital -- already a highly regarded name in the business by virtue of leading over 250 of its borrowers to an IPO or acquisition -- maintain its stock's premium pricing. This ultimately helps the BDC secure more cost-effective capital, which in turn attracts more of the private lending market's most attractive borrowers.

Image source: Hercules Capital Q1-2024 investor presentation.

Bottom line? It's not an ideal choice for your first or only dividend stock. If you've already secured enough reliable income and dividend growth through other names, however, Hercules would be a great way for volatility-tolerant income investors to add a bit of "umph" to their portfolio's cash flow.

Should you invest $1,000 in Hercules Capital right now?

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.