A Monthly Dividend Stock in Tech?
In recent years, tech stocks have been some of the biggest gainers in the U.S. stock market. But, to be honest, not every tech company is a good fit for an income portfolio. Tech stocks tend to have high volatility (double-digit moves every other day are not uncommon), and most of them don’t pay substantial dividends.
Does that mean income investors have to stand on the sidelines during the tech boom? Not really. Today, I’m going to show you a unique way to capitalize on the booming technology industry. The method is perfect for income investors as it generates a monthly income stream with a 10.78% annual yield.
Horizon Technology Finance Corp (NASDAQ:HRZN) is a business development company (BDC) headquartered in Farmington, Connecticut. As the name suggests, Horizon provides financing solutions to companies in the technology sector. To be more specific, it specializes in investing in venture capital-backed and private equity-backed growth-stage companies.
Growth-stage businesses are capable of creating massive returns for their investors, but they are also known to be riskier than the already-established blue-chip companies. Why should income investors—who tend to have lower risk tolerance than venture capitalists—consider investing in growth-stage companies?
Well, that’s because Horizon Technology Finance Corp doesn’t really invest in equities of these tech companies. Instead, it provides secured loans, most of which are first-lien loans. This not only limits the risk of Horizon’s business, it creates an income stream from the debt investments.
The company also uses diversification. While Horizon has the word “technology” in its name, its portfolio also consists of investments in life science, healthcare information and services, and clean technology sectors. By providing secured loans to more than 80 different companies, Horizon limits its risk when one company encounters a problem. (Source: “Portfolio,” Horizon Technology Finance Corp, last accessed October 19, 2017.)
Of course, Horizon is not the only player in the business. Private venture debt funds, tech banks, and other BDCs also lend money to growth-stage tech companies. The good news is that Horizon has found its sweet spot; with each transaction between $5.0 million and $25.0 million, the company manages to lock in a yield of between 11% and 14%. (Source: “Investor Presentation Second Quarter 2017,” Horizon Technology Finance Corp, last accessed October 19, 2017.)
With handsome returns from its loan portfolio, Horizon dishes out generous dividends. Right now, the company pays $0.10 per share, usually around the 15th of each month. That gives HRZN an annual yield of 10.78%, making it a true high-yield monthly dividend stock in today’s market.
Final Thoughts on This Monthly Dividend Stock
Investing in growth-stage businesses was once an opportunity only available to the super-rich. But thanks to Horizon being a publicly traded business development company, HRZN stock allows regular retail investors to get a piece of the action, too. Adding in its generous distributions, this could be a top monthly dividend stock for income investors.