Bullish, 11.3%-Yielding SCM Stock Near Record Levels
Stellus Capital Investment Corp Pays Monthly
Thanks to President Donald Trump’s pro-business policies (which include lowering the corporate tax rate from 21% to 15%), lower interest rates, and solid economic growth, now is a great time for dividend investors to take a look at business development companies (BDCs).
BDCs, or what we call “Alternative Banks” here at Income Investors, help provide some much-needed capital to small- and medium-sized U.S. businesses to help them grow their companies. Big traditional banks don’t help fund smaller companies because they are just that, too small for them, even though some of these so-called small businesses can generate in excess of $100.0 million in annual revenue.
Traditional financial institutions also have to pay the government between $0.25 and $0.35 in taxes on each dollar they make in profit. BDCs pay little or no corporate tax on their earnings.
In exchange for this benefit, BDCs must distribute at least 90% of their ordinary taxable income to shareholders. As a result, these companies pay out some of the biggest dividend yields around.
One of the better performing BDCs right now is Stellus Capital Investment Corp (NYSE:SCM).
Houston-Texas-based Stellus Capital is a BDC that specializes in investing in private middle-market companies in the U.S. and Canada. It invests through first-lien, second-lien, unitranche, and mezzanine debt financing, often with a corresponding equity investment. (Source: “Overview,” Stellus Capital Investment Corp, last accessed January 14, 2025.)
Stellus generally makes investments of between $20.0 million and $100.0 million in companies generating between $5.0 million and $50.0 million of earnings before interest, taxes, depreciation, and amortization (EBITDA).
To date, the BDC has completed over 350 investments and currently has more than 80 active investments with $3.4 billion in assets under management.
Some of the sectors Stellus invests in include aerospace and defense, consumer products and services, distribution, financial services, food and beverage, health care, industrial services, media and entertainment, and software and technology.
Some of the companies the BDC has invested in are Ad.net., Atkins Nutritionals, Dr. Scholl’s, Petmate, US Auto, and Zelis Healthcare. (Source: “Portfolio,” Stellus Capital Investment Corp, last accessed January 14, 2025.)
Another Solid Quarter
For the third quarter ended September 30, 2024, Stellus announced that investment income totaled $26.5 million, most of which was interest income from portfolio investments. (Source: “Stellus Capital Investment Corporation Reports Results for its Third Fiscal Quarter Ended September 30, 2024,” Stellus Capital Investment Corp, November 7, 2024.)
Net investment income, which is the BDC’s way of reporting earnings, came in at $10.3 million, or $0.47 per share, down slightly from $10.8 million, or $0.47 per share, in the same prior-year period.
Core net investment income for the three months ended September 30, 2024 was $10.6 million, or $0.40 per share, down from $11.2 million, or $0.49 per share, in the third quarter of 2023.
Commenting on the results, Robert T. Ladd, Stellus Capital’s chief executive officer, said, “I am pleased to report solid operating results for the quarter ended September 30, 2024, in which we earned U.S. GAAP net investment income of $0.39 per share and core net investment income of $0.40 per share, which covered the regular dividend declared of $0.40 per share. Subsequent to the quarter end, we increased our capital base by $55 million through the upsizing of our Credit Facility to $315 million.”
Maintains Monthly Distribution of $0.1333/Share
Thanks to reliable core net investment income, Stellus is able to provide investors with a reliable monthly dividend. It just completed its 12th anniversary. Within that time, the BDC has returned $273.0 million, to investors, equivalent to $16.28 per share. That works out to 118% of its current share price.
In early January, the company declared a monthly dividend of $0.1333 for each of January, February, and March, totaling $0.40 per share, or $1.60 per share, for a current forward dividend yield of 11.73%. (Source: “Stellus Capital Investment Corporation Announces $0.40 First Quarter 2025 Regular Dividend, Payable Monthly in Increments of $0.1333 in February, March, and April 2025,” Stellus Capital Investment Corp, January 9, 2025.)
SCM Stock Trading Near Record Levels
Stellus Capital is coming off a great year, where SCM stock’s share price rallied an impressive 20.36%. That’s the total return and includes reinvested dividends.
To show just how important it is to reinvest dividends and take advantage of compounding, had an investor decided to cash in those monthly dividends instead in 2024, the total return would have dropped to 7.08%.
On October 25, 2024, SCM stock hit a fresh record high of $14.03 per share. The stock continues to trade near those levels.
Trading at record levels and having a reliable, high-yield distribution isn’t all that common.
More often than not, an ultra-high-yield dividend is attached to a stock that’s depressed. That’s because the share price and dividend have an inverse relationship.
However, this isn’t the case with Stellus Capital.
Strong share price appreciation and a big dividend are what SCM shareholders have come to expect. To this point, SCM stock has a five-year average dividend yield of 10.54%.
Moreover, SCM stock continues to do well. As of January 14, 2025, the stock is up 18.9% on an annual basis and 3.5% over the last six months.
Chart courtesy of StockCharts.com
The Lowdown on SCM Stock
Stellus Capital Investment Corp continues to be one of the longest-tenured BDCs specializing in senior secured loans in the lower middle market. Collectively, Stellus has invested over $8.5 billion in lower middle market credit and equity investments across multiple cycles and industries over the last 20 years.
Thanks to its reliable cash flow, SCM stock shareholders have been on the receiving end of a reliable monthly dividend. The 62 institutions that hold a 12.3% stake in the company have been as well. Some of the biggest institutional holders include Raymond James & Associates and Morgan Stanley.