A High-Yield Monthly Dividend Stock for Income Investors
If you could have an extra check deposited to your brokerage account every month, would you do it? Of course, you would. As a matter of fact, a lot of investors have already cashed those checks—from monthly dividend stocks.
Monthly dividends can come in extremely handy for income investors. Among the monthly dividend stocks trading in today’s market, one company stands out: Gladstone Capital Corporation (NASDAQ:GLAD).
Gladstone makes money by lending it out to small- and medium-sized businesses (SMBs) in the United States. Because of the relatively high yield on these loans, the company is able to generate handsome returns from its portfolio. Most of those returns are passed on to Gladstone stock investors in the form of monthly dividends.
Of course, investing in high-yield loans does carry a level of risk. But note that, while Gladstone focuses on SMBs, it is not investing in some startup company with no revenue. In fact, companies that receive financing from Gladstone typically have annual operating cash flow of between $3.0 million and $15.0 million.
Also, this monthly dividend company focuses on senior loans. By the end of 2016, more than half of Gladstone’s total investments are in first lien secured loans. This form of debt will be paid first in the event of a company’s liquidation. In contrast, preferred and common equity—the relatively riskier part of investing in SMBs—only make up 6.2% of Gladstone’s total investment portfolio.
As is the case with any type of lending activity, diversification is important. The good news is that Gladstone’s portfolio of loans and equity investments is diversified, not only at the company level, but also across industries. As of December 31, 2016, no single industry accounts for more than 19% of the company’s portfolio. Gladstone’s three largest industry exposures are diversified service; diversified manufacturing; and healthcare, education, and childcare.
Industry Diversification
(Source: “Corporate Profile December 31, 2016,” Gladstone Capital Corporation, last accessed May 16, 2017.)
Furthermore, once the money is lent out, Gladstone monitors those companies’ performance by participating in their boards. The company also proactively manages its exposure and conducts regular reviews of its portfolio.
Here’s the best part: because of Gladstone’s company structure, it is required by law to distribute almost all its profits to shareholders through dividend payments.
Gladstone is structured as a business development company (BDC). BDCs are similar to real estate investment trusts (REITs) and master limited partnerships (MLPs) in that, as long as they satisfy certain income, diversity, and distribution requirements, they can avoid paying taxes at the corporate level. The pass-through tax structure makes these companies some of the highest-yielding stocks in today’s market.
Gladstone Capital currently pays monthly dividends of $0.07 per share. At today’s price, that translates to an annual dividend yield of 8.5%.
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Gladstone targets lower-middle-market businesses, which aren’t really the hottest investments. As a result, these businesses often have lower multiples of earnings, including lower borrowing levels compared to earnings. Meanwhile, despite having solid asset collateral coverage and lender protective covenants, lower-middle-market businesses don’t really get much financing from large commercial banks.
The lack of big, institutional lenders in the lower-middle market allows Gladstone to generate attractive investment yields. At the end of 2016, the weighted average yield on the company’s loan portfolio was 11.3%. And that’s why this monthly dividend stock can reward shareholders with oversized dividend payments.
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High-yielding stocks are not always the safest bets, but Gladstone has been delivering solid returns. In the company’s past five fiscal years, Gladstone Capital stock generated a total return of 98.6%, beating both the S&P 500 Index and its BDC peers.
Last, but certainly not least, interest rates are on the rise, which would not be good news if the company holds too many fixed-rate loans. Fortunately, the vast majority of Gladstone’s loan portfolio is made up of variable rate loans. Any increase in market interest rates could translate into more interest income for this monthly dividend company.
(Source: Ibid.)
Compared to the other best dividend stocks favored here at Income Investors, Gladstone’s business may not seem that impressive. But, due to the simple yet profitable nature of its operation, this monthly dividend stock is still worth considering.