The Most Exciting 10.5% Yielder on the Market?
This High-Yield Stock Looks Interesting
In today’s market, high-yield stocks usually come from relatively boring industries, such as pipelines and real estate. And there’s nothing wrong with that. If a boring business can generate enough profit to back a generous dividend policy, it should be good enough for most income investors.
But if the business turns out to be exciting, it would be even better, right?
Check out TriplePoint Venture Growth BDC Corp (NYSE:TPVG), which in my opinion just might be the most exciting high-yield stock on the market.
TPVG helps fund the expansion of venture-growth-stage businesses in the technology, life sciences, and other high-growth industries. Its investment objective is to generate current income with preservation of capital.
Now, you might be wondering how a venture-capital-like business can generate current income.
Well, the company invests primarily in secured growth-capital loans with targeted returns between 10% and 18%. At the same time, those loans could also provide additional upside through equity “kickers” in the form of warrants. In the third quarter of 2019, the weighted average annualized portfolio yield on TPVG’s debt investments was 13%. (Source: “Investor Presentation,” TriplePoint Venture Growth BDC Corp, November 6, 2019.)
The best part is that TPVG chooses to be regulated as a business development company (BDC) under the Investment Company Act of 1940. That means it must distribute at least 90% of its profits to investors through dividends. In return, the company pays little to no income tax at the corporate level.
By being a pass-through entity, TriplePoint offers one of the most generous dividend streams in the entire stock market.
Right now, the company pays investors quarterly dividends of $0.36 per share. With TPVG stock trading at $13.73 apiece, that quarterly rate translates to an annual yield of 10.5%.
TriplePoint Venture Growth BDC Corp: Can You Count on the Distributions?
Investing in high-growth businesses certainly sounds exciting, but high-yield debt can also be risky.
The good news is, TriplePoint Venture Growth BDC Corp is not investing in start-ups. Instead, the company targets venture-growth-stage businesses. A typical target business would have annual revenues of at least $20.0 million and would have received several rounds of venture capital financing already.
At the same time, TPVG is not lending out money long-term. It generally provides short-term financing for three to four years. That’s a good enough time frame to lock in some decent returns because a typical borrower tends to be preparing for an initial public offering (IPO) or a merger and acquisition (M&A) in the next one to three years.
Furthermore, while TriplePoint Venture Growth’s investments are mostly in the tech sector, the portfolio is still diversified across different industries.
As of September 20, 2019, the company’s three largest industry exposures based on fair value of investments were business applications software (13.5%), consumer products and services (9.6%), and financial institution and services (8.7%). No other industry accounts for more than eight percent of the BDC’s portfolio.
Of course, to really check a BDC’s dividend safety, we need to take a look at its net investment income and compare it to the actual payout.
According to TriplePoint Venture Growth’s latest earnings report, the company earned a net investment income of $0.29 per share in the third quarter of 2019. For the quarter, the BDC paid a cash distribution of $0.36 per share. (Source: “TriplePoint Venture Growth BDC Corp. Announces Third Quarter 2019 Financial Results,” TriplePoint Venture Growth BDC Corp, November 6, 2019.)
In other words, the company’s profits did not cover its payout for the quarter.
Going further back, though, things looked better. In the first nine months of 2019, TriplePoint Venture Growth’s net investment income came in at $1.09 per share. The amount was in excess of its distributions for the quarter totaling $1.08.
Obviously, that’s still not very strong distribution coverage. But I want to point out that, even though investing in venture-growth-stage businesses could be risky, TPVG does have a pretty solid distribution history. Since the company’s IPO in March 2014, it has paid steady or increasing dividends for 23 consecutive quarters. (Source: “Stock Information,” TriplePoint Venture Growth BDC Corp, last accessed February 4, 2020.)
Also, while the BDC’s fourth-quarter results are yet to be announced, it will likely have some spill-over income at year-end.
In TVPG’s third-quarter earnings conference call, chief financial officer Chris Mathieu said, “After giving effect of these declared distributions, we continued to estimate spillover income consistent with our spillover at year-end 2018, which totaled approximately $4.6 million or $0.185 per share.” (Source: “TriplePoint Venture Growth BDC’s (TPVG) CEO Jim Labe on Q3 2019 Results – Earnings Call Transcript,” Seeking Alpha, November 6, 2019.)
Bottom line: TriplePoint Venture Growth BDC Corp is not the safest dividend stock, but it does offer oversized returns in the form of cash distributions. For income investors who also want to be venture capitalists, TPVG stock could be worth a look.