Great Elm Capital Corp: Monthly Dividend Stock Now Yields 11.7%
An Oversized Monthly Income Stream to Consider
To be honest, when I first came across Great Elm Capital Corp (NASDAQ:GECC), my reaction was likely just like yours: “Is this too good to be true?”
Great Elm is a business development company (BDC) headquartered in Waltham, Massachusetts. Its stock trades at less than $10.00 per share, yet the company pays monthly dividends with a staggering double-digit annual yield.
Just think about that for a second. As income investors, we know how appealing monthly dividends are: instead of waiting three months for a dividend check, shareholders of monthly dividend stocks can get paid every single month. This makes it great for people who want to use their dividend income to cover day-to-day expenses, because most of our bills have to be paid every month.
The consequence of this appeal is that whenever a company can pay solid monthly dividends, its stock becomes highly sought after. And that usually puts downward pressure on its yield.
For instance, Realty Income Corp (NYSE:O), which is probably the most well-known monthly dividend stock on the market (the company brands itself as “The Monthly Dividend Company”), yields just 3.8% as of this writing.
Therefore, when you see a monthly dividend payer with a payout more than three times that of Realty Income, you are probably wondering whether it’s too good to be true.
Well, let’s find out.
Is the Dividend Safe at Great Elm Capital Corp?
As I said, GECC is a business development company. And like many of its BDC peers, it provides financing solutions to middle market businesses. To be more specific, Great Elm invests mainly in the debt of private middle market companies with enterprise values ranging from $100.0 million to $2.0 billion.
As of March 31, Great Elm Capital had 26 debt investments and seven equity investments in 24 companies from 21 different industries. Its portfolio had a fair value of $185.7 million. Thanks to GECC’s focus on debt investments, its portfolio generates a weighted average current yield of 11.3%. And that’s how the company was able to establish a generous dividend policy. (Source: “Investor Presentation – Quarter Ended March 31, 2019,” Great Elm Capital Corp, May 14, 2019.)
Now, I should point out that, compared to Realty Income, which has been paying monthly dividends for decades, Great Elm Capital is a relatively new name to stock market investors.
Still, the company was determined to pay monthly dividends right off the bat. Great Elm completed its initial public offering in November 2016 and declared its monthly distribution rate of $0.083 per share in December of that year. Since then, the company has maintained that same monthly cash distribution rate. (Source: “Distribution Information,” Great Elm Capital Corp, last accessed June 6, 2019.)
With GECC stock trading at $8.48 per share at the moment, the company offers an annual yield of 11.7%.
Mind you, monthly dividends aren’t the only payments that GECC stock investors have received. At the end of 2017, the company declared a special dividend of $0.20 per share, which was paid in January 2018. And then, at the end of 2018, management announced another special dividend of $0.24 per share. That dividend was paid in January 2019.
As for dividend safety, note that last year, Great Elm Capital generated net investment income of $1.44 per share. For the year, the company paid $0.996 per share in regular dividends, plus the aforementioned $0.24-per-share special dividend—adding up to $1.236 per share. (Source: “Great Elm Capital Corp. Announces Fourth Quarter and Year End 2018 Financial Results,” Great Elm Capital Corp, March 13, 2019.)
That is, even after including the hefty special dividend, Great Elm was paying out just 85.8% of its net investment income, leaving a sizable margin of safety.
In the first quarter of 2019, Great Elm Capital’s net investment income came in at $2.8 million, or $0.26 per share. Again, the amount was more than enough to cover the three monthly dividends paid for the quarter, totaling $0.249 per share. (Source: “Great Elm Capital Corp. Announces First Quarter 2019 Financial Results,” Great Elm Capital Corp, May 14, 2019.)
As a matter of fact, since Great Elm’s inception in 2016, the company’s net investment income has covered its declared distribution every single quarter.
A Vote of Confidence
Last but certainly not least, GECC stock has a relatively high level of insider ownership.
In the company’s latest earnings conference call, President and Chief Executive Officer Peter Reed said, “Importantly, greater than 20% of GECC’s shares are held between Great Elm Capital Group Inc., Great Elm Capital Management Inc.’s employees and GECC’s Board of Directors creating a very clear alignment of interest between management and our shareholders.” (Source: “Great Elm Capital Corporation (GECC) CEO Peter Reed on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, May 14, 2019.)
If you listen to enough earnings conference calls, you’ll notice that it’s hard to find a CEO that’s not optimistic about their company. But talk is cheap, and not every management team is willing to put their money where their mouth is. Therefore, high insider ownership—like what we see at Great Elm Capital Corp—is often considered a more genuine vote of confidence.
Bottom line: if you are looking for a monthly dividend stock with an ultra-high yield, GECC might be as good as it gets.