Horizon Technology Finance Corp: This Monthly Dividend Stock Yields 10.2%
A High-Yield Monthly Dividend Stock to Think About
In this day and age, the vast majority of dividend-paying companies follow a quarterly distribution schedule, meaning shareholders have to wait three months between dividend checks. And that’s why more and more investors have started shopping for monthly dividend stocks. Since most of our bills have to be paid every month, a monthly dividend stream would make the budgeting process much easier for income investors.
With that in mind, let’s check out Horizon Technology Finance Corp (NASDAQ:HRZN).
Headquartered in Farmington, Connecticut, Horizon is a specialty finance company that provides financing solutions to venture capital-backed businesses in the technology, life science, healthcare information and services, and cleantech industries.
The company follows a monthly distribution schedule. With a dividend rate of $0.10 per share, HRZN stock has an annual yield of 10.2%. That makes it one of the highest-yielding monthly dividend stocks on the market.
One of the reasons why Horizon Technology Finance can offer such a big payout is that it is structured as a business development company (BDC). BDCs are essentially pass-through entities that must distribute at least 90% of their profits to investors through regular dividend payments. In exchange, BDCs generally don’t have to pay income taxes at the corporate level.
Horizon Technology Finance Corp Runs a Solid Business
Another reason behind Horizon’s jaw-dropping yield is its stable business model. While the company has made both debt and equity investments over the years, its main business is secured lending.
As of March 31, Horizon Technology Finance’s portfolio consisted of 35 secured loans with an aggregate fair value of $235.3 million; warrant, equity, and other investments with an aggregate fair value of $17.5 million; and a 50% equity interest in a joint venture that had a fair value of $13.3 million. (Source: “Horizon Technology Finance Announces First Quarter 2019 Financial Results,” Horizon Technology Finance Corp, April 30, 2019.)
In other words, secured debt accounted for 88% of the company’s total investment portfolio.
The business is also quite lucrative. In the first quarter of 2019, Horizon achieved an annualized portfolio yield on debt investments of 14.4%.
By having a high-yield, secured debt investment portfolio, Horizon Technology Finance can generate a predictable stream of interest income, which can then be used to fund its oversized monthly dividends.
And if you are worried about the risks associated with managing a high-yield debt portfolio, note this: As of March 31, 2018, the company had no loans on nonaccrual.
A nonaccrual loan is a loan that’s not generating its stated interest rate due to a nonpayment from the borrower. The fact that Horizon had no nonaccruals essentially means that all of the loans in the company’s lending portfolio were generating their stated interest rates.
Can You Count on This Double-Digit Yield?
Now, a company that pays quarterly dividends usually declares its dividend one at a time. But because Horizon Technology Finance pays dividends more frequently, management has decided to declare three monthly dividends all at once.
Last month, the board of directors declared monthly cash dividends of $0.10 per share payable in each of July, August, and September 2019. (Source: “Horizon Technology Finance Announces Monthly Distributions for July, August and September 2019 Totaling $0.30 per Share,” Horizon Technology Finance Corp, April 30, 2019.)
Looking back, we see that, since HRZN’s initial public offering in 2010, the company has declared total dividends of $12.02 per share. That’s quite a chunk of cash, considering that when the company first started trading, it had a stock price of around $15.00 per share. (Source: “Dividend History,” Horizon Technology Finance Corp, last accessed May 1, 2019.)
Of course, like most double-digit yielders, Horizon Technology Finance is not exactly perfect. In particular, the company’s dividend coverage could use some improvement.
Last year, the company earned a net investment income of $1.20 per share while paying total dividends of $1.20 per share. So while the company covered its payout, it did not leave any room for error. (Source: “Horizon Technology Finance Announces Fourth Quarter and Full Year 2018 Financial Results,” Horizon Technology Finance Corp, March 5, 2019.)
In the first quarter of this year, Horizon’s net investment income came in at $0.28 per share, which was actually lower than its three monthly dividend payments totaling $0.30 per share for the quarter. (Source: “Horizon Technology Finance Announces First Quarter 2019 Financial Results,” Horizon Technology Finance Corp, April 30, 2019.)
“We recorded net investment income per share in the first quarter of $0.28, $0.02 below our distribution rate but we should note that we funded two separate $15 million venture loans one on March 31, and the other on April 1, and thus generated no interest income from those loans during the first quarter,” said Chairman and Chief Executive Officer Rob Pomeroy. (Source: “Horizon Technology Finance (HRZN) CEO Rob Pomeroy on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, May 1, 2019.)
“We will see the full benefit of those investments in our second quarter performance.”
Worth noting is that, as of March 31, the company had an undistributed spillover income of $0.10 per share.
The Bottom Line on HRZN Stock
Ultimately, I wouldn’t call this monthly dividend stock a slam dunk. But if Horizon Technology Finance Corp can consistently cover its payout using net investment income going forward, its 10.2% yield would be worth a look.