Earn a Monthly Income That Grows Over Time
For the most part, investors of monthly dividend stocks are looking for a steady stream of income. But that income doesn’t have to stay constant.
Case in point, Gladstone Investment Corporation (NASDAQ:GAIN) announced last week that its board of directors approved a 1.5% increase to its monthly payment to shareholders. The new monthly dividend rate of $0.068 per share will start with the company’s October 31 payment. (Source: “Gladstone Investment Increases Monthly Cash Distributions to Common Stockholders and Announces Monthly Cash Distributions, a Supplemental Distribution to Common Stockholders, and Second Fiscal Quarter Earnings Release and Conference Call Dates,” Gladstone Investment Corporation, October 9, 2018.)
Mind you, this was not the first time that GAIN stock investors got a raise. In fact, in 2017, Gladstone Investment announced two dividend hikes. Then, in April 2018, the company raised its dividend again. Looking a bit further back, you’ll see that over the past five years, Gladstone Investment’s monthly dividend rate has grown by 36%. (Source: “Distribution History and Tax Information,” Gladstone Investment Corporation, last accessed October 11, 2018.)
Trading at $10.67 apiece, GAIN stock offers investors an annual dividend yield of 7.6%.
Gladstone Investment Corporation: How It Makes Money
When most companies pay less than four percent, a 7.6% yield is more than generous. Combining that with GAIN stock’s monthly dividend schedule, you might be wondering how the company can afford this kind of payout.
Well, Gladstone Investment Corporation is a business development company. Headquartered in McLean, Virginia, the company provides financing solutions to lower-middle-market businesses in the United States. Gladstone’s debt investments usually take the form of senior term loans, senior subordinated loans, and junior subordinated debt.
Lending to lesser-known companies may sound risky, but note that the company does not really invest in startups. Gladstone targets lower-middle-market companies that usually have earnings before interest, tax, depreciation, and amortization (EBITDA) of $3.0 million to $20.0 million and are already cash-flow positive. (Source: “Quarterly Overview June 30, 2018,” Gladstone Investment Corporation, last accessed October 11, 2018.)
To further manage the risk associated with its lending business, Gladstone Investment runs a well-diversified portfolio. As of June 30, the company’s portfolio—which had a fair value over $629.0 million—was diversified across 33 companies coming from 17 different industries and 16 states. This means if one company—or even one industry—enters a downturn, the impact on the company’s total portfolio income stream will likely be limited.
Gladstone Investment Corporation is able to generate some serious returns from its lending business. In the second quarter of 2018, the yield on the company’s interest-bearing debt investments stood at 13%.
Is the Dividend Safe?
Based on the financial results that are available so far, we see that in the past four quarters (from July 1, 2017 to June 30, 2018), Gladstone Investment generated adjusted net investment income of $0.84 per share. The company’s regular dividends, on the other hand, totaled $0.783 per share during this period. That translated to a payout ratio of 93.2%. (Source: “Gladstone Investment Corporation Reports Financial Results for its First Quarter Ended June 30, 2018,” Gladstone Investment Corporation, August 1, 2018.)
While the payout ratio suggests that the company made more than enough money to meet its monthly dividend obligations, it does not leave much room for error.
GAIN Stock: Shareholders Collecting More Than Just Monthly Dividends?
For income investors, a monthly distribution schedule is usually as good as it gets. But at Gladstone Investment, shareholders are getting an even better deal.
You see, when the company’s board of directors raised the monthly dividend rate last week, they also announced a supplemental distribution of $0.06 per share, which will be paid in December 2018. In a market as volatile as it is right now, few things are better than windfall cash gains like a special dividend.
The reason why Gladstone can pay the special dividend is that other than lending, the company also invests in equity. When it makes capital gains on investment exits, those gains are passed on to shareholders as supplemental distributions. GAIN stock already paid a special dividend earlier this year and two in 2017.
In its dividend hike press release, the company said it plans to, “continue paying semi-annual, supplemental distributions each fiscal year.” (Source: Gladstone Investment Corporation, October 9, 2018, op cit.)
If you take into account the two special dividends the company plans to pay annually, you would see that GAIN stock has a forward yield of 8.8%.
At the end of the day, conservative income investors would probably want to see a lower payout ratio for a wider margin of safety. But with a monthly dividend policy and an oversized yield, Gladstone Investment Corporation could be worth a look.