Updated February 27, 2023 Samuel Smith
It’s not hard to see why business development companies (BDCs) are a popular investment target among income investors. Given that the S&P 500 Index currently has an average dividend yield of just 1.6%, these high-yielding stocks are very attractive by comparison.
BDCs typically offer very high dividend yields. For example, Gladstone Investment Corporation (GAIN) is a BDC with a current dividend yield of 6.9%.
It’s also one of the few stocks that pays dividends monthly instead of quarterly. GAIN is one of 50 monthly dividend stocks.
We’ve put together a complete list of 50 monthly dividend stocks. Click the link below to download a complete Excel spreadsheet of all monthly dividend stocks (including key metrics like dividend yields and payout percentages) can.
GAIN stocks combine high yields and monthly payouts, making them ostensibly very attractive to income investors. But of course, investors should assess GAIN’s business quality, future growth potential, and dividend sustainability before purchasing shares.
This article discusses GAIN’s business model and whether a high dividend yield is too good.
Business overview
GAIN is a business development firm that makes debt and equity investments in small and medium-sized private companies in early stage development. Annual EBITDA for these companies typically ranges from $3 million to $20 million.
An overview of GAIN’s investment process can be seen in the image below.
Source: Presentation for investors
The Trust’s debt investments consist primarily of senior term loans, senior subordinated loans and junior subordinated loans.
On the equity side, investments primarily consist of preferred or common stock, or options as a means of acquiring shares. Equity investments are typically made in anticipation of a buyout or some form of capital increase. The investment will be made in the low-mid market segment, which stands for medium-sized companies. GAIN intends to split its portfolio between 75% and 25% between debt and equity investments.
GAIN makes money in two ways. First, capital gains are realized when the investment is successful. In addition, we receive interest and dividend income from the securities we hold.
The company aims to invest in businesses that provide stable income and cash flow, which GAIN will use to pay its operating expenses, meet its own debts, and distribute the remaining cash flow to its shareholders. I can.
BDC reported its third quarter (the period ending December 31).st) February 1 resultsstTotal investment income increased 29% year-over-year to $21.6M, up 3.8% from the second quarter. The increase was primarily due to higher interest income and higher dividend and performance fee income. NII per share was $0.26, up from $0.25 in Q3 2021. In addition, interest income from investments in debt securities increased by 20.4%.
Book value per share was $13.43 as of December 31, up from $13.31 as of September 30. Total Debt Cost Base of $66.6 million.
In the third quarter, Gladstone posted a net realized gain on investment of $3.8 million. This was primarily due to his $13.4 million realized gain from the recapitalization of Old World Christmas and his $0.5 million realized gain related to exiting certain investments.
growth outlook
GAIN’s investment strategy has been successful over the past few years. Over the past five years, the company’s earnings have grown at his mid-single-digit CAGR, which isn’t bad at all for such a high-yielding investment.
Gladstone Investments makes a profit on the spread between the interest the company pays on the cash it borrows and the interest it receives on the cash it lends. This is the same principle as banks. Despite declining interest rates over the past few years, Gladstone Investments’ weighted average investment yields have held up remarkably well. The company was yielding around 13% before the pandemic.
Short-term headwinds will arise from higher credit losses caused by deteriorating economic conditions, but we do not expect this to affect profitability over the long term.
In addition, the majority of GAIN’s debt portfolio is floating rate and has a lower or lower floor. This helps protect interest income in an environment of rising interest rates. Our continued growth will depend on the successful execution of our investment strategy. This seems likely given the company’s proven history.
We expect 3% annual growth in NII per share over the next five years. GAIN’s shareholders have benefited from the company’s strong investment track record, but whether this performance will hold up in a deep recession is another matter.
Competitive Advantage and Recession Performance
GAIN also has a lasting competitive advantage due to its unique expertise in the lower middle market private debt & equity segment. Low and medium-sized companies are broadly defined as companies with annual sales between his $5 million and his $50 million.
This segment is generally too small to be financed by commercial banks, but too large to be financed by the SME representatives of retail banks. GAIN fills this gap. Funding this unloved group of private companies allows GAIN to realize extraordinary returns compared to its larger commercial bank counterparts.
Listed below are GAIN’s net investment income per share and distribution per share before, during and after the last recession.
- 2007 net investment income per share – $0.67
- 2008 net investment income per share – $0.79 (up 18%)
- 2009 net investment income per share – $0.62 (down 22%)
- 2010 net investment income per share – $0.48 (down 23%)
The company’s historical distributable net income during the Great Recession is as follows:
- Net Distributable Investment Income 2007 – $0.85
- Net Distributable Investment Income 2008 – $0.93 (up 9%)
- Net Distributable Investment Income 2009 – $0.96 (up 3%)
- 2010 net distributable investment income – $0.48 (down 50%)
GAIN returned to growth by 2011, although net investment income per share declined significantly during the last recession.
In 2020, GAIN’s NII per share fell by 23% as the coronavirus pandemic plunged the U.S. economy into recession, but the company was able to maintain its monthly dividend payments. Increased dividend by 7% in October 2021.
Dividend analysis
One of the reasons why BDCs like GAIN are able to pay high dividends is their favorable tax regime. GAIN qualifies as a regulated investment company. As such, as long as taxable income is distributed to shareholders, it is not normally subject to corporate tax.
GAIN is a very attractive stock for dividend investors. It currently pays a monthly dividend of $0.08 per share. On an annual basis, a dividend of $0.96 per share represents a current dividend yield of 6.9%.
The company has a long history of producing stable dividend payments to shareholders.
Source: Presentation for investors
Not only that, GAIN also offers additional dividends from undistributed capital gains and investment income. For example, on January 10, 2023, the company declared an additional dividend payment of $0.24 per share, in addition to the regular monthly dividend paid in March.
GAIN has a fairly conservative capital structure, which helps secure dividends. Gladstone Investment’s dividend payout ratio to net investment income has been close to or above 100% for several years over the past decade.
Gladstone Investments is able to generate income from equity investments that are not reflected in the Net Investment Return metric, so companies are generally more profitable than the Net Investment Return metric would suggest.
final thoughts
GAIN’s strongest competitive advantage is its investment strategy of making long-term investments in high-quality businesses with strong management teams. This has allowed GAIN to achieve great results from the beginning.
Moreover, shareholders can expect GAIN to pay additional dividends if the investment strategy works well. Therefore, GAIN is a high-dividend stock that is attractive to investors primarily interested in income.
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