Saratoga Investment Corp: This 8.5% Yielder Could Pay Investors Even More
A High-Yield Stock You May Have Never Heard Of
Most people have never heard of Saratoga Investment Corp (NYSE:SAR), but the company stands as one of the most attractive high-yield stocks in today’s market.
Headquartered in New York City, Saratoga Investment Corp is a business development company (BDC). Like many BDCs, the company provides financing solutions to middle-market businesses in the United States.
Paying quarterly dividends of $0.54 per share, SAR stock has an annual yield of 8.5%.
Saratoga Investment Corp Offers a Safe Yield of 8.5%
Of course, if you use a stock screener, you can easily find companies with even bigger yields than Saratoga. What makes SAR stock stand out is the safety of its payout.
You see, despite investing in both debt and equity, Saratoga’s core business is senior secured lending. According to the company’s latest investor presentation, first-lien loans accounted for 50.5% of the company’s total portfolio fair value, while second-lien loans accounted for another 31.3%. (Source: “Saratoga Investment Corp. (NYSE:SAR) May 2019,” Saratoga Investment Corp, last accessed May 16, 2019.)
By definition, a lender of first lien will be standing first in line to get paid in the event of a borrower liquidation. By having most of its portfolio invested in first- and second-lien loans, Saratoga Investment Corp is running a relatively safe business in the BDC industry.
These loans can provide big returns, too. By the end of the third quarter of the company’s fiscal-year 2019, the weighted average yield on its investment portfolio was 10.8%.
Thanks to Saratoga’s solid business model, the company has no problem covering its oversized dividends. In its third fiscal quarter, the company earned an adjusted net investment income of $0.65 per share, which easily covered its quarterly dividend rate of $0.53 per share at the time. (Source: “Saratoga Investment Corp. Announces Fiscal Third Quarter 2019 Financial Results,” Saratoga Investment Corp, January 9, 2019.)
In the first nine months of Saratoga’s fiscal-year 2019, the company generated $1.98 per share in adjusted net investment income. During this period, management declared total dividends of $1.56 per share. That translated to a payout ratio of 78.8%.
Among stocks that yield eight percent or more, it’s not every day that you see a payout ratio that leaves such a wide margin of safety.
An Overlooked Dividend Growth Stock
Now, what could be even better than a safe yield of 8.5%?
How about an 8.5% yield that keeps on growing? Well, that is exactly what Saratoga Investment Corp offers.
You see, despite being an overlooked stock by most market participants, SAR has churned out some very impressive dividend growth lately. Looking back, we see that the company has raised its cash payout to shareholders for 18 consecutive quarters. (Source: “Dividends & Splits,” Saratoga Investment Corp, last accessed May 16, 2019.)
“Our ability to increase our dividend payment for more than four straight years sets us strongly apart from our BDC competition and underscores the value of our high quality management team, ample available liquidity, disciplined credit analysis and robust investment sourcing pipeline,” said Chairman and CEO Christian L. Oberbeck in the company’s latest dividend increase announcement. (Source: “Saratoga Investment Corp. Increases Quarterly Dividend to $0.54 per Share Represents the 18th Sequential Quarterly Dividend Increase,” Saratoga Investment Corp, February 26, 2019.)
Get Ready for Another Dividend Hike
Based on previous patterns, the board of directors of Saratoga Investment Corp usually conducts another review of the company’s dividend policy at the end of May. Given the company’s profitable business and conservative payout ratio, management will likely want to continue that quarterly dividend increase track record.
In other words, we can expect Saratoga to announce another dividend hike in the next two weeks. And investors who purchase SAR stock today could lock in a yield even higher than the current 8.5%.