Prospect Capital: 12.77%-Yielding BDC Has Insiders Loading Up Shares
March 31, 2025
Why PSEC Stock’s a Great Opportunity for Income Investors
When interest rates were near zero, income investors had a tough time finding decent yields. But things have changed. With rates significantly higher than before and expected to remain elevated, despite the anticipated cuts for this year and next, income investors shouldn’t overlook business development companies (BDCs).
BDCs lend money to small- and mid-sized businesses—often at higher interest rates than big banks do—and distribute most of their earnings to shareholders in the form of dividends. So, higher interest rates allow BDCs to become cash-generating machine for income investors.
With this said, take a look at Prospect Capital Corporation (NASDAQ:PSEC). Investors have been sour on this stock—PSEC stock has dropped closed to 13% over the past one year. But it presents an interesting opportunity for those seeking out steady income. Prospect Capital certainly isn’t the hottest name in the market, but its high yield and decent financials, and the fact that insiders are buying, make it attractive.
What Does Prospect Capital Do?
Prospect Capital is one of the largest BDCs out there, operating since 2004. The company offers financing to middle-market businesses across various industries, focusing on senior and secured lending. The BDC has a team of over 130 professionals that bring with them vast experience in investing across a range of industries and through multiple economic and investing cycles.
As of December 31, 2024, 81% of Prospect Capital’s investments were first-lien or senior-secured loans. Of the total investment income for the BDC, 91% consisted of interest income from loans. (Source: “Why Invest In Prospect?” Prospect Capital Corporation, last accessed March 23, 2025.)
Prospect Capital has made over 400 investments totaling more than $21.0 billion, boasting 114 portfolio companies in 33 industries. The BDC’s investments have a fair value of $7.13 billion.
A Solid Financial Performance
On February 10, Prospect Capital reported its financial results for quarter ending December 31, 2024. The BDC generated net investment income of $86.4 million, or $0.20 per share. This is a critical metric, as it tells us how much the BDC generates from its investments.
However, the company did report a net loss of $31.0 million, or $0.07 per share. This loss was largely attributed to a paper loss that doesn’t necessarily impact cash flow. Despite this, its net asset value (NAV) remained at $7.84 per share, providing a solid foundation for investors to consider.
Investors are currently pricing PSEC stock at around $4.22. This means that the stock is trading roughly 46% below its NAV. (Source: “Prospect Capital Announces Financial Results for Fiscal December 2024 Quarter,” Prospect Capital Corporation, February 10, 2025.)
PSEC Pays Monthly Dividend
Looking at the dividend, you’ll see that PSEC stock pays monthly.
However, there’s been a minor setback: Prospect Capital recently reduced its monthly dividend. PSEC stockholders have been getting paid $0.045 per share each month since late 2024, compared to $0.06 per share between 2018 and October 2024.
At the current rate, PSEC has a dividend yield of 12.77%, paying $0.54 per share on annual basis. This is a massive payout in today’s investing environment when you are getting around 4.2% by holding U.S. government bonds.
Are the BDC’s future dividends safe?
In late 2024, when Prospect Capital announced cuts to its monthly distribution, it wasn’t because the company was going though problems. Rather, it was a strategic move, as the BDC includes structured credit collateralized loan obligation (CLO) equity and real estate investments in its investing mix.
Since its initial public offering, Prospect Capital has distributed a total of $4.4 billion in dividends.
Chart Courtesy of StockCharts.com
It’s also worth noting here that, in spite of Prospect Capital reducing its dividend, its stock trades well above where it was in 2019/2020. Essentially, this hints that investors may be pessimistic, but they haven’t lost their trust in the company’s management.
Insider Buying: A Bullish Signal?
Beyond all of this, if there’s one thing that can boost confidence in a stock, it’s insider buying. When executives put their own money into the stock, it signals that they believe in the business.
Prospect Capital’s chief executive officer (CEO), John F. Barry, has been an active buyer of PSEC stock. In December 2024, he purchased two million shares. Then, in early March 2025, Barry bought another two million shares.
Since then, the CEO’s been buying smaller amounts. However, since that big purchase, he has bought just over one million shares of PSEC. Barry now owns over 82.5 million shares! (Source: “Insider Trading,” Finviz, last accessed March 24, 2025.)
The Lowdown on Prospect Capital
Prospect Capital Corporation isn’t really a growth stock, and it may not be for investors looking to speculate. But for those seeking a double-digit dividend yield, PSEC stock is hard to ignore.
Sure, the stock price has been volatile recently, but there’s a good business in place here. The BDC has a solid investment in place, with a strong balance sheet and liquidity. And insiders buying PSEC make it even more attractive.
With interest rates expected to stay high, BDCs like Prospect Capital could continue to benefit from strong lending. Maybe that’s why its three biggest institutional holders, Van Eck Associates, Legal & General Group, and Morgan Stanley, own over 13.6 million shares of PSEC stock. (Source: “Holders,” Yahoo! Finance, last accessed March 24, 2025.)
