This 7.3% Yielder Could Actually Pay 9.7% (& Possibly Even More)
A High-Yield Stock You Likely Haven’t Considered
As a business development company (BDC) with a market capitalization of about $610.0 million, Newtek Business Services Corp (NASDAQ:NEWT) isn’t exactly a well-known name in the investment community. But for those who want to earn oversized dividends, this little-known stock deserves a serious look.
Allow me to explain.
In the first quarter of 2021, Newtek Business Services Corp declared and paid a cash dividend of $0.50 per share. With NEWT stock trading at $27.22 per share at the time of this writing, that quarterly payout translates to an annual yield of 7.3%. That’s certainly a very attractive yield in today’s market.
But there’s more.
Rather than pay the same dividends every quarter—which is what most dividend stocks do—Newtek stock pays dividends that tend to vary from quarter to quarter.
Take a look at the following table; it shows the company’s per-share payout for each quarter over the last three years.
NEWT Stock Dividend History
(Source: “Dividend and Split History,” Newtek Business Services Corp, last accessed April 30, 2021.)
Not all investors like variable dividend programs. After all, most income investors want certainty in their dividend streams. If you don’t know how much a company is going to pay in the next quarter, it can make things more difficult for those who want to live off dividend income.
And if you add the numbers up annually, you’ll see that Newtek stock paid total dividends of $1.80 per share in 2018, $2.15 per share in 2019, and $2.05 per share in 2020. The higher payout in 2019 was certainly nice, but there was a dip in 2020.
Note that Newtek’s decision to pay a lower dividend in 2020 was “in light of unprecedented market conditions,” and it was actually the first annual dividend decrease in the company’s history. (Source: “Full Year 2020 Financial Results Conference Call,” Newtek Business Services Corp, March 23, 2021.)
Also, while the company doesn’t have a fixed dividend rate, it does provide an annual dividend forecast. In fact, management recently increased the forecast range.
Previously, Newtek expected to pay total dividends between $2.00 and $2.50 per share in full-year 2021. Then, on March 22, the company raised its annual dividend forecast to a range of $2.40 to $2.90 per share. (Source: “Newtek Business Services Corp. Increases its 2021 Annual Dividend Forecast to a Range of $2.40 to $2.90 per Share,” Newtek Business Services Corp, March 22, 2021.)
Keep in mind that the first-quarter dividend of $0.50 per share paid at the end of March 2021 already represented a 13.6% increase over the $0.44 per share paid in the year-ago period. If the company can achieve the midpoint of the new guidance range—meaning it pays $2.65 per share of total dividends in 2021—it will achieve a 29.3% dividend increase over the $2.05 per share paid in full-year 2020.
This also has implications in terms of yield. If you look up NEWT stock online, most financial web sites will show a yield of 7.3%. As I mentioned earlier, that yield is calculated by annualizing the most recent quarterly dividend of $0.50 per share and dividing it by the current share price. But now we know that the company plans to pay more than $2.00 per share in annual dividends this year. If we divide the midpoint of the new dividend forecast range by Newtek stock’s price today, we arrive at an annual yield of 9.7%.
And if the company manages to reach the higher end of its guidance range, NEWT stock’s yield will be even higher.
Of course, no dividend is carved in stone. Newtek could also arrive at the lower end of its guidance range or even miss the range completely. My point is that, because Newtek stock’s payout varies from quarter to quarter, the method of calculating its yield by annualizing its most recent quarterly dividend doesn’t provide an accurate picture of the company’s dividend-paying potential.
It’s also worth noting that Newtek Business Services Corp is somewhat of a unique player in the BDC industry.
Most BDCs are middle-market or lower-middle-market lenders. Newtek does have a lending business, but the company also provides a wide range of business and financial solutions to the small and medium-sized business market. These include various loans (including SBA 7(a) loans and 504 loans), electronic payment processing, managed technology solutions, e-commerce, accounts receivable financing, inventory financing, payroll, and benefits solutions—just to name a few.
In 2020, Newtek earned adjusted net investment income of $2.05 per share. Considering that the company paid total dividends of $2.05 per share for the year, it covered its payout but didn’t leave much room for error. (Source: “Newtek Business Services Corp. Reports Full Year 2020 Financial Results,” Newtek Business Services Corp, March 22, 2021.)
Bottom Line on Newtek Business Services Corp
As I always say, for the most risk-averse income investors, it’s better to stay with blue-chip dividend stocks.
But for those who want oversized yield and don’t mind a variable dividend policy, Newtek stock is definitely worth considering.