Earn a 12.3% Yield from This Monthly Dividend Stock
To see why this monthly dividend stock is special, let’s do some quick math.
If you invest $100,000 into 10-year U.S. Treasury notes right now, you would be earning a return of $2,243 per year.
Now, if you put the same amount of money into Prospect Capital Corporation (NASDAQ:PSEC), which yields 12.31%, you would be collecting $12,310 in dividends a year. And the dividend checks are mailed to you every month. That’s an extra $10,000 of annual income you could use to pay down your mortgage, take a vacation, or do whatever you want with.
But of course, high-yield stocks usually carry a lot more risk than U.S. Treasuries. So instead of telling you how wonderful Prospect Capital’s business is, I’m going to focus more on how the company manages its risk.
Prospect Capital is a business development company or BDC. It makes debt and equity investments in middle-market companies in the U.S. and Canada. With approximately $7.0 billion in capital under management, Prospect Capital is one of the largest BDCs in today’s market.
In order for a monthly dividend stock to pay a steady dividend, it needs to generate stable cash flows. When it comes to generating cash flows, debt investments are usually preferred to equity investments in early state companies because of the more predictable interest income. At Prospect Capital, most of its portfolio is invested in first-lien and second-lien senior loans, meaning the company will be the first ones to get paid in the event of a liquidation.
As a matter of fact, approximately 95% of Prospect Capital’s net investment income in the first quarter of 2017 came from interest earned on its debt investments. (Source: “Prospect Capital Reports March 2017 Quarter Results,” Prospect Capital Corporation, May 9, 2017.)
Source: “Prospect Capital Corporation,” Prospect Capital Corporation, last accessed August 3, 2017.
Moreover, for a company whose business is investing in middle-market companies—many of which are yet to become established players in their industries—diversification is critical to risk management. The good news is, Prospect Capital’s portfolio is well-diversified.
By the end of the first quarter, the company’s portfolio consisted of investments in 36 different industries. The energy sector, which is subject to commodity price risk, represents just 2.6% of Prospect Capital’s portfolio. And most of the company’s energy sector investments are in the form of secured debt.
Source: “Prospect Capital Corporation,” Prospect Capital Corporation, last accessed August 3, 2017.
Last but certainly not least, there’s interest rate risk. Here in the U.S., companies have gotten used to artificially low interest rates for the most part of the last decade. But now, interest rates are rising. Will this monthly dividend stock be able to handle a few more rate hikes?
Well, as it turns out, higher interest rates may actually be a catalyst for Prospect Capital. You see, 90.7% of the company’s interest-bearing assets are floating rate and only 9.3% is fixed-rate. So when interest rates rise, the company would see an increase in its interest income.
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Also, 99.9% of Prospect Capital’s liabilities are fixed-rate. This means its interest repayment burden would stay fixed despite interest rates increases.
With floating rate assets and fixed-rate liabilities, Prospect Capital could see its financials improve if the U.S. Federal Reserve decides to further increase its benchmark interest rate.
Source: “Prospect Capital Corporation,” Prospect Capital Corporation, last accessed August 3, 2017.
At the end of the day, keep in mind that due to the nature of Prospect Capital’s business, its dividends are probably not as safe as, say, Johnson & Johnson’s (NYSE:JNJ). But the company has put in a lot of effort into managing its risk, and with a 12.3% yield, this monthly dividend stock is worth checking out for income investors.