Updated May 26, 2021 by Bob Ciura
It’s not difficult to understand why business development companies – or BDCs – are popular investments with high income investors. Given that the S&P 500 Index currently has an average dividend yield of just 1.4%, 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% and the occasional additional dividend payouts that add to the yield even further.
And it’s one of the few select stocks that pays its dividend every month rather than every quarter. GAIN is one of 55 monthly dividend stocks.
We’ve put together a full list of 55 monthly dividend stocks. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics like dividend yield and payout ratio) by clicking the link below:
GAIN stocks have a combination of high yield and monthly payouts, which on the surface is very attractive to high income investors. Of course, before buying any stocks, investors should assess the quality of GAIN’s business, future growth potential, and the sustainability of the dividend.
This article discusses GAIN’s business model and whether its sky-high dividend yield is too good to be true.
GAIN is a business development company that makes debt and equity investments in small and medium-sized private companies that are in the early stages of development. These companies typically have annual EBITDA in the $ 3 million to $ 20 million range.
An overview of the GAIN investment process is shown in the following figure:
Source: Investor Presentation
The trust’s debt securities consist primarily of senior loans, senior subordinated loans and subordinated subordinated loans.
On the equity side, investments consist primarily of preferred or common stocks or options as a means of acquiring stocks. Investments are usually made in anticipation of a buyout or recapitalization. Investments are made in the lower middle market segment, ie in 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, if its investments are successful, it will realize capital gains. It also receives interest and dividend income from securities it holds.
The Company intends to invest in companies that have stable earnings and cash flow that GAIN can use to pay operating expenses, meet its debt obligations, and make distributions to shareholders with remaining cash flow.
Recent earnings reports have highlighted the challenges GAIN’s portfolio companies faced over the past year due to the coronavirus pandemic. The BDC reported on his fourth-quarter ((for the period until the end March 31) Results on Can 11. The Company generated Total investment returns– –Revenue equivalent of Gladstone Investment– –from $16.7 Million during the quarter, a decline of 4th% compared to the same quarter of the previous year. This number beat the analyst consensus estimate at $3 millionas expected by analysts a wider refuse herm the top line of the company.
Adjusted Net investment income– –Per– –The stock (NIIPS) was $ 0.20 for the tax fourth Quarter, up 16.7% from $ 0.24 per share in the year-ago quarter. Gladstone Investment ‘s Net assets value per share total $11.52 at the end of the quarter, Which was above from $ 11.11 at the end of the previous quarter. The increase was because its net profitson one not– –Adjusted basis, dividend payments exceeded during the quarter.
NIIPS 2020 was down quite significantly compared to 2019, due to the effects of the pandemic. It It looks like the company is making sense to recoverin the current financial year and beyond.
GAIN’s investment strategy has been successful in recent years. In the past five years, profits have grown by 4.3%. annually what is not a very high growth rate, but that is Likewise Not at all disappointing for a high– –Return return.
Gladstone Investment makes its money Via spreads between the interest rates, the company pays on the cash that it pays borrows, and the company’s interest rates gets on cash it lends– –the same principle as with banks. Falling interest rates could turn into headwinds so far Gladstone Investment’s weighted average return on interest has held up very well;; the Company achieved a return of around 13th%. before the pandemic.
A short one– –The short-term headwinds will come from higher credit losses caused by the Coronavirus crisis, but we don’t see any long-term impact on profitability.
In addition, the majority of the GAIN debt portfolio is floating rate, with a floor or a minimum. This will help protect interest income in an environment where interest rates are rising. Further growth in the future will depend on the successful implementation of the investment strategy, which, given the company’s history with proven results, appears likely.
We expect NII growth of 3% per share annually for the next five years, which we believe is a reasonable estimate of future growth considering all of the above. The GAIN shareholders benefit from the company’s strong investment performance. Whether this performance would hold up in a severe recession is another question.
Competitive advantage and recession performance
GAIN also has an enduring competitive advantage due to its unique expertise in the lower mid-market for private debt and stocks. Smaller mid-market companies are broadly defined as companies with annual sales between $ 5 million and $ 50 million.
This segment is generally too small for commercial banks to lend, but too large for small business representatives of retail banks to lend. GAIN fills this gap. By putting money in this unloved group of private companies, GAIN can generate oversized returns compared to its larger commercial bank counterparts.
The following is the net investment income per share and the distribution per share of GAIN 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 (23% decrease)
The company’s historic distributable net income during the Great Recession is set out below:
- 2007 distributable net investment income – $ 0.85
- 2008 distributable net investment income – $ 0.93 (up 9%)
- Net distributable investment result 2009 – $ 0.96 (up 3%)
- 2010 net distributable investment result – $ 0.48 (50% decrease)
GAIN saw a sharp decline in net investment income per share during the last recession, although the company was back on a growth path through 2011. Since then, the results for this key figure have varied from year to year.
In 2020, as the coronavirus pandemic plunged the U.S. economy into recession, GAIN’s NII percentage per share fell 23%, but the company was able to maintain its monthly dividend payments.
One reason BDCs like GAIN can pay high dividends is because of a favorable tax structure. GAIN qualifies as a regulated investment company. As such, it is generally not subject to income tax as long as it distributes taxable income to shareholders.
GAIN is a very attractive stock for dividend investors. It currently pays a monthly dividend of $ 0.07 per share. On an annual basis, the dividend of $ 0.84 per share corresponds to a current dividend yield of 6.0%.
The company has a long history of consistently paying dividends to shareholders.
Source: Investor Presentation
In addition, GAIN offers additional dividends from undistributed capital gains and capital gains. For example, in April 2021, the company announced an additional dividend payout of $ 0.06 per share on top of its regular monthly dividend.
Going forward, GAIN plans to make two such additional dividend payments each year. Including additional dividends, the return would be over 7%.
GAIN has a modest capital structure that helps secure the dividend. Gladstone Investment’s payout ratio in relation to investment income was close to or over 100% for several years over the last decade.
The company is usually more profitable than net investment income Metric suggests, due to the fact that Gladstone Investment can also generate profits from its investments, the are not taken into account in the metric of the investment result.
GAIN’s strongest competitive advantage is its investment strategy of making long-term investments in high quality companies with strong management teams. This has produced strong results for GAIN since its inception.
Additionally, shareholders can expect GAIN to make additional dividend payments if its investment strategy performs well. Hence, GAIN is a high dividend stock that is attractive to investors who are primarily concerned with income.
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