Why This High-Yield Stock Looks Interesting
Among the ultra-high-yielders in today’s market, Oaktree Specialty Lending Corp (NASDAQ:OCSL) is a rare find.
You see, most dividend-paying companies would be proud if they can raise their payout once a year. Oaktree, on the other hand, decided to do so more frequently.
On August 5, the board of directors of Oaktree Specialty Lending declared a quarterly cash distribution of $0.145 per share, representing an 11.5% increase over the prior quarterly payment of $0.13 per share. The dividend will be paid on September 30 to shareholders of record as of September 15. (Source: “Dividends,” Oaktree Specialty Lending Corporation, last accessed August 6, 2021.)
Note that this announcement marked the company’s fifth consecutive quarterly distribution increase.
That’s right. Even though OCSL stock isn’t a well-known ticker, it has been delivering dividend hikes every three months.
With Oaktree Specialty Lending stock trading at $7.25 apiece at the time of this writing, its latest dividend rate translates to an annual yield of 8.1%.
Now, some might suspect that the reason behind these continuous distribution increases must be that the company had cut its payout last year and it’s just playing catch-up now. After all, plenty of high-yield stocks slashed their dividends in light of the COVID-19 pandemic in 2020.
But that’s not the case at all. Oaktree Specialty Lending Corp was paying quarterly dividends of $0.095 per share in 2019—before the pandemic started. It maintained its payout at that level for its March 2020 and June 2020 payments. Then, starting with the September 2020 payment, the company was raising its dividend every single quarter.
This also means the company’s current quarterly dividend rate is actually 52.6% above its pre-COVID payout.
The chart below shows how OCSL stock’s dividend per share has evolved since the beginning of 2019.
(Source: Ibid.)
Of course, a yield of more than eight percent in the current market environment doesn’t exactly scream dividend safety. So the big question now is: can the company afford those payout increases?
Well, one of the reasons behind Oaktree Specialty Lending Corp’s generous dividend policy is that it chooses to be regulated as a business development company (BDC).
BDCs tend to be on the higher end of the yield spectrum because they are required by law to distribute most of their profits to shareholders through dividends. In return, BDCs pay little to no income tax at the corporate level.
Oaktree Specialty Lending Corp is in the business of providing flexible and innovative financing solutions to companies with limited access to public or syndicated capital markets. Its investments can take the form of first- and second-lien loans; unsecured and mezzanine loans; and preferred equity.
As of June 30, Oaktree’s portfolio consisted of investments in 135 different companies. The weighted average yield of its debt investments was 8.4%. (Source: “Earnings Presentation: Third Quarter 2021,” Oaktree Specialty Lending Corporation, August 5, 2021.)
In other words, by earning oversized interest income from its portfolio, the BDC is able to pay oversized dividends.
Obviously, the lending business is not risk-free. But at Oaktree Specialty Lending, things have been relatively resilient.
During the company’s fiscal year 2020, which ended September 30, 2020, it generated adjusted net investment income of $0.51 per share while paying total dividends of $0.39 per share. So the BDC was able to cover its payout despite the impact of the pandemic. (Source: “Oaktree Specialty Lending Corporation Announces Fourth Fiscal Quarter and Full Year 2020 Financial Results and Declares Increased Distribution of $0.11 Per Share,” Oaktree Specialty Lending Corporation, November 19, 2020.)
According to its latest earnings report, Oaktree Specialty Lending’s adjusted net investment income came in at $0.19 per share for the third fiscal quarter of 2021, which ended June 30. The amount was well in excess of the company’s June 2021 distribution of $0.13 per share. (Source: “Oaktree Specialty Lending Corporation Announces Third Fiscal Quarter 2021 Financial Results and Declares Increased Distribution of $0.145 Per Share,” Oaktree Specialty Lending Corporation, August 5, 2021.)
Also, the company reported that there were no investments on non-accrual status as of June 30.
Bottom Line on Oaktree Specialty Lending Corp
To conclude, Oaktree Specialty Lending stock is a high-yield stock that pays a steady, increasing stream of dividends to investors. Oaktree Specialty Lending Corp’s business has been resilient throughout the pandemic, and its payout has been well covered.
For investors who want to earn oversized yield in today’s market, OCSL stock deserves a serious look.