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Prospect Capital: Risky But High Potential Reward for 10% Dividend Stock

Prospect Capital: Risky But High Potential Reward for 10% Dividend Stock
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Thursday, 16 May 2019 09:28 AM Current | Bio | Archive

With the average stock in the S&P 500 Index yielding just ~2% right now, and the Federal Reserve having paused its interest rate hikes, income investors looking for high dividend payouts are in a difficult position.

Some stocks offer extremely high dividend yields of 10% or more, even among stocks that make monthly dividend payments. But investors should know the risks before investing in speculative stocks with extremely high yields.

Prospect Capital (PSEC) is a monthly dividend stock with a dividend yield above 10%, which his highly attractive for income investors. With that said, investors should know the risks before buying.

Business Overview

Prospect Capital is a Business Development Company, also called a BDC. The business model for most BDCs is to invest in small-and-midsize companies, often privately-held firms, that are typically at an earlier stage of growth. Prospect Capital invests in such companies using debt or equity. Prospect Capital targets middle-market companies, and its investment portfolio spans over 40 different industries.

Prospect Capital recently reported financial results for its most recent quarter. For the three-month period ending March 31, the company reported net interest income (NII) of $77.2 million. This was a 10% increase from the same quarter last year. On a per-share basis, NII increased 10.5% to $0.21.

New investments provided the bulk of Prospect Capital’s growth last quarter. The company’s average annualized current yield from its investment portfolio dipped 30 basis points from the previous quarter. The Federal Reserve recently suspended its interest rate increases. As roughly 91% of Prospect Capital’s total investment income is derived from interest payments, the high concentration of debt investments means the company would be boosted by higher interest rates.

Dividend Analysis

Prospect Capital currently pays a monthly dividend of $0.06 per share. In the most recent quarter, the company paid dividends of $0.18 per share. Fortunately, NII per share of $0.21 sufficiently covered the dividend payouts over the three-month period. Prospect Capital’s dividend payout ratio of 86% in the recent quarter is high, meaning investors need to keep an eye on future earnings releases to make sure coverage remains below 100%.

Deteriorating company fundamentals could prompt a dividend cut from Prospect Capital, which previously reduced its dividend by 28% in August 2017. That said, the dividend appears to be sustainable at the present time.

Clearly, the draw for Prospect Capital is in its ability to generate cash to return to shareholders and over time, it has done that well. The company has declared 133 consecutive monthly cash distributions to shareholders. In all, Prospect Capital has now declared distributions totaling $17.40 per share to investors.

Prospect Capital has a very appealing dividend yield above 10%. Investors comfortable with the unique risks of investing in BDCs could find Prospect Capital stock to be quite attractive for income. The dividend appears safe for now, but investors should continuously monitor the company’s net investment income for any signs of trouble that could potentially lead to further dividend cuts down the road.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Prospect Capital (PSEC) is a monthly dividend stock with a dividend yield above 10%, which his highly attractive for income investors. With that said, investors should know the risks before buying.
prospect, capital, 10%, dividend, stock
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2019-28-16
Thursday, 16 May 2019 09:28 AM
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