A Monthly Dividend Stock You Likely Haven’t Considered
Over the last several years, monthly dividend stocks have been highly sought after. As a result, prices of the most well-known monthly dividend payers have already been bid up, causing their yields to drop. Looking at the market today, you would be lucky to find a blue-chip monthly dividend stock paying more than six percent.
However, that doesn’t mean investors looking to earn a monthly income have to settle for a low yield. If they are willing to dig into the not-so-hot areas of the stock market, they might just find a hidden dividend-paying gem with a double-digit yield.
For instance, Horizon Technology Finance Corp (NASDAQ:HRZN) pays monthly dividends of $0.10 per share. At its current price, that translates to an annual dividend yield of 10.9%.
Horizon is a business development company, or BDC. For those not in the know, business development companies are like venture capital firms, as they invest in privately held companies. But because many BDCs trade on major stock exchanges, retail investors can get a piece of the action too.
Horizon invests in companies in the technology, life science, healthcare information and services, and cleantech industries. Here’s the neat part: instead of making equity investments, Horizon focuses on making loans to these companies. This not only reduces the level of risk, but also allows the company to collect a predictable stream of income from its debt investments.
And because Horizon is structured as a business development company, it is required by law to distribute at least 90% of its profits to shareholders in the form of dividends. In return, the company does not have to pay any income tax at the corporate level.
Thanks to a tax pass-through structure and mandatory distribution requirements, many BDCs have become the higher-yielding stocks in the current market.
Of course, lending money to tech startups can be a risky business. The good news is that Horizon does not actually invest in early-stage companies. In the technology market, Horizon focuses on later-stage and venture-growth-stage companies. In the life science market, the company lends to later-stage, venture-growth-stage, and also public companies.
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One of the reasons why Horizon can pay such generous dividends is that its business is highly profitable. The company’s debt investments are usually between $5.0 million and $25.0 million per transaction. The yield on these investments ranges from 11% to 14%. (Source: “Investor Presentation Second Quarter 2017,” Horizon Technology Finance Corp, last accessed September 22, 2017.)
Moreover, Horizon’s lending strategy emphasizes risk management. The company focuses on making senior-term loans, and particularly first-lien secured loans. This means if the borrower goes through liquidation, its assets will be first provided to Horizon as repayment for its borrowings.
The Best is Yet to Come?
Right now, there is a very good reason to take a look at this monthly dividend stock: rising interest rates.
The U.S. Federal Reserve kept its benchmark interest rates at artificially low levels for the most part of the last decade. But now, the Fed is raising rates again.
While some companies are worried about their financial profiles under a rising rate environment, Horizon is actually well positioned for higher interest rates. This is because by the end of the second quarter, floating rate loans made up approximately 99% of the company’s loan portfolio (Source: “Horizon Technology Finance Announces Second Quarter 2017 Financial Results” Horizon Technology Finance Corp, August 1, 2017.)
So when interest rates rises, Horizon would be earning higher interest income from its portfolio. And that’s why this monthly dividend stock deserves income investors’ attention today.
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