Prospect Capital Corp: PSEC Stock’s Top Monthly Dividend

PSEC Stock

Top Monthly Dividend Stock for 2017

If your main motivation to invest is to earn a top monthly dividend, then your options are limited. Most of the top dividend-paying stocks distribute payouts quarterly, which may not match with your monthly expenses. Today, I’ve picked Prospect Capital Corporation (NASDAQ:PSEC) stock, which has a solid history of rewarding its investors with monthly dividend income.

Prospect Capital Corporation is a business development company (BDC) that provides private debt and equity capital to middle-market companies in the U.S. and Canada. Investing in business development companies, which generally offer financing to young and often distressed people with credit ratings in the “junk” category, could be a risky proposition.

But higher risk potentially brings greater returns. PSEC stock is one of the top monthly dividend-paying stocks, with over 100 months of income distribution history. Its current monthly dividend is $0.08 per share, offering a top dividend yield of 12.6%.

Another incentive which makes BDCs an attractive option for investors seeking higher dividend income is that they don’t pay corporate income tax and, by law, have to distribute at least 90% of their taxable income to shareholders.

With over $7.0 billion dollars of capital available to invest, PSEC stock has the flexibility to pick companies which provide a greater return and stability in their income. So far, Prospect Capital has 125 long-term investments across a range of industries, plus a low exposure to energy, which only makes up three percent of its total investments. (Source: “Why Invest In Prospect?,” Prospect Capital Corporation, last accessed October 31, 2016.)

Because Prospect Capital Corporation operates in a midsized and relatively risky area, it has smartly focused its investments where it can get first-lien and second-lien rights. What it means is that in a forced liquidation scenario, Prospect Capital will have “senior debt holder” status, and the company will be paid first from the sale of the assets pledged to secure the loan. These preferential investments comprise approximately 71% of Prospect Capital’s portfolio. (Source: Ibid.)

For income investors, picking a company with a monthly dividend distribution over a quarterly payout has another advantage: investors can multiply their income faster by more frequently reinvesting in the company’s stock. It works exactly the same way as compounding works in an interest-paying bank account, where you can multiply your income by reinvesting your profit.

Though there isn’t much logic to buying a stock just because it pays a monthly dividend, many investors seeking to match their monthly expenses with a dividend paycheck may not have any other viable options when interest rates are extremely low and income from bonds and saving accounts is so little.

Bottom Line on PSEC Stock

PSEC has used income from these debt and equity investments to pay attractive dividends with yields that have often been higher than other income-oriented investments, such as master limited partnerships and real estate investment trusts.

Another interesting aspect which I’ve noticed while analyzing PSEC stock is that there isn’t much volatility in its stock price when you compare it with other risky bets in the same domain. For the past year, PSEC stock has risen about seven percent, while it’s down about 16% over the past five years.

One reason for this relatively modest performance is that Prospect Capital mainly invests in companies with a history of stable revenues and profitability, with a primary focus on preserving capital and generating current cash yields.

This low-interest-rate environment is also working in Prospect Capital’s favor, as it gets access to cheap credit to deploy in those opportunities which offer higher spreads. I think PSEC stock offers an attractive risk/reward combination for investors seeking a top monthly dividend and who are also open to look beyond traditional dividend stocks.

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