This 11.2% Yield (Paid Monthly) Looks Interesting
Is This High-Yield Stock Worth Considering?
For income investors, few things are better than monthly dividend stocks. But because of their popularity, the most well-known monthly dividend companies have already gotten expensive, meaning their yields are now subdued.
And that’s why Horizon Technology Finance Corp (NASDAQ:HRZN) has caught my attention. The company pays monthly dividends of $0.10 per share, which, at the current price, translates to a staggering annual yield of 11.2%.
In today’s market, ultra-high yielders usually come from real estate or the midstream energy sector. But Horizon Technology is a bit different. Instead of being a landlord or a pipeline operator, Horizon operates a venture lending platform that specializes in providing financing solutions to companies in the technology sector.
Now, technology is not really known as the safest industry; companies come and go all the time. But note that rather than being an equity investor, Horizon Technology’s main business is making first-lien secured loans. Therefore, even when a borrower defaults, the company still has a chance of getting its money back.
Moreover, even though Horizon can be considered as a venture capitalist, it doesn’t invest that much in startups. In fact, as you can see from the chart below, the company focuses on making loans to expansion stage and later stage companies. Early-stage businesses, which tend to be more risky, only account for seven percent of Horizon’s portfolio. (Source: “Investor Presentation,” Horizon Technology Finance Corp, last accessed March 12, 2018.)
Portfolio Breakdown by Stage
The portfolio is well-diversified too. Right now, Horizon has over 80 portfolio companies coming from more than 10 different industries.
Because privately held development-stage tech companies don’t always receive loans from large banks, they have to pay higher interest rates to get financing. And that’s where Horizon found its opportunity. With each loan ranging from $5.0 million to $25.0 million in size, Horizon is able to earn an average annual yield of between 11% and 14% from its investments.
Going forward, the company is set to capitalize on the rising interest rate environment. As of December 31, 2017, floating rate loans comprised 99% of the outstanding principal balance of Horizon’s loan portfolio. So if interest rates go up—which they probably will, given the U.S. Federal Reserve’s plan for multiple rate hikes for 2018—Horizon Technology would be able to earn higher interest income from its loan portfolio. (Source: “Horizon Technology Finance Announces Fourth Quarter and Full Year 2017 Financial Results,” Horizon Technology Finance Corp, March 6, 2018.)
However, like most double-digit yielders, HRZN stock is not perfect. Distribution coverage was okay in the third quarter of 2017, with the company generating net investment income of $0.33 per share while paying total dividends of $0.30 per share. But in the fourth quarter, net investment income came in at just $0.21 per share, which was less than the $0.30 per share of dividends Horizon paid out.
Still, with interest rates on the rise, Horizon’s business could get a solid boost. And if the company can improve its dividend coverage, it’s 11.2% annual yield would be worth considering.