1 High-Yield Stock to Consider
If you go after the hottest tickers in today’s market, chances are you won’t find yields that can whet the appetite of income investors. This is because while the top gainers can be generous dividend-paying companies, the rally in their share prices means the yields are now subdued.
So in this article, I’m going to talk about a company that’s far from being a top gainer. It trades near its 52-week low, but the yield is quite impressive.
The company in question is Medley Capital Corp (NYSE:MCC), a closed-end investment firm headquartered in New York City.
Most people have never heard of Medley Capital, but it runs an extremely lucrative business. The company lends money to middle-market companies in the U.S. to help them expand their businesses, refinance, and make acquisitions. In return, it earns a decent stream of interest income from these loans.
As of June 30, 2017, Medley Capital’s portfolio had a weighted average yield of 11%. (Source: “Investor Presentation,” Medley Capital Corp, last accessed November 28, 2017.)
The neat thing is, because Medley Capital is structured as a business development company, it is required by law to distribute at least 90% of its profits to shareholders every year in the form of dividends.
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The company currently pays quarterly dividends of $0.16 per share, giving MCC stock an annual yield of 11.02%.
Of course, with a yield that’s higher than 99% of companies trading on U.S. stock exchanges, there have been some concerns about Medley Capital’s dividend safety. And since the company has cut its payout before, long-term investors tend to have second thoughts about putting their money in MCC stock.
On that front, note that even though the company doesn’t have the best dividend-paying track record, its current level of payout seems to be safe. In the third quarter of the company’s fiscal 2017, Medley Capital generated net investment of income of $0.18 per share while declaring $0.16 of dividend per share. That translated to a dividend coverage ratio of 1.13 times, leaving a margin of safety. (Source: “Medley Capital Corporation Announces June 30, 2017 Financial Results,” Medley Capital Corp, August 9, 2017.)
Furthermore, even though Medley Capital’s share price has tumbled quite a bit in recent years, the company has actually been improving its portfolio. In 2011, approximately 66% of Medley Capital’s assets were fixed rate, while nearly all its liabilities were floating rate. Today, around 83% of the company’s assets are floating rate, while most of its liabilities have become fixed rate.
In other words, the company is much better positioned for the rising interest rate environment than it was before. When interest rates increase, Medley Capital would generate substantially higher interest income without incurring too much in interest expenses.
The portfolio has become well-diversified, too. Medley Capital currently has debt investments in 60 companies coming from 22 different industries. Its top three industry exposures–Business Services, Construction & Building, and Healthcare & Pharmaceuticals–account for 16%, 14%, and 10% of its portfolio, respectively. (Source: Medley Capital Corp, last accessed November 28, 2017, op cit.)
Final Thoughts on Medley Capital Corp
At the end of the day, not everyone is willing to challenge the prevailing sentiment towards MCC stock. But with a well-covered double-digit payout, Medley Capital could be worth considering for the yield-seeking investor.