Business Development Companies – or BDCs, for short – allow investors to generate strong current income and robust total returns while minimizing the amount of tax that is paid at the corporate level.
Despite these advantages, business development companies are generally avoided by investors. This is likely due to the tax implications of their distributions for their shareholders.
More specifically, the dividends of business development companies are composed of returns of capital, qualified dividends, non-qualified dividends, and capital gains. Despite this added headache come tax time, BDCs can still be worthwhile for income investors.
Prospect Capital Corporation (PSEC) is one of the more attractive business development companies right now. The BDC has a strong track record of delivering total returns to shareholders, and currently has an eye-popping dividend yield of 12.2%. This makes Prospect one of a select group of companies with 5%+ dividend yields.
You can see the full list of 295 stocks with 5%+ dividend yields here.
Better yet, Prospect actually pays monthly dividends, giving its shareholders a steady, predictable passive income stream ideal for retirees and other income-oriented investors.
You can see the full list of monthly dividend stocks here.
Prospect’s high dividend yield and monthly dividend payments are two of the reasons why the company merits further research.
This article will discuss the investment prospects of Prospect Capital Corporation in detail.
Business Overview
Prospect Capital Corporation is a business development company that was founded in 2004. Prospect Capital is one of the largest business development companies and currently has approximately $7 billion of assets under management.
Details about Prospect Capital’s business model can be seen below.
Source:Â Prospect Capital Corporation Investor Presentation, slide 2
Prospect Capital’s corporate profile is very similar to Main Street Capital Corporation (MAIN), another business development company that was recently analyzed on Sure Dividend.
Prospect Capital is a leading provider of private equity and private debt financing for middle market companies. A middle market company is broadly defined as a company with between 100 and 2,000 employees. There is not a widely-followed revenue band that is used to define a middle market company.
Operating in the middle market is beneficial for Prospect Capital because of the lack of competition from larger, more established lenders.
Middle market companies are generally too small to be the customers of commercial banks, but too large to be served by the small business representatives of retail banks. The ‘sweet spot’ between these two services is where Prospect Capital does business.
This lack of competition in this sector has allowed Prospect Capital to finance some truly attractive deals. The company’s current portfolio yield is 12.3% and has seen levels exceeding 13% in recent quarters.
More details about Prospect Capital’s current portfolio holdings can be seen below.
Source:Â Prospect Capital Corporation Investor Presentation, slide 8
Investors should note that Prospect Capital is well-poised to benefit from rising interest rates.
This is because the company’s liabilities (debt that Prospect owes to lenders) is 99.9% fixed rate, while its interest-bearing assets (debt that other companies owe to Prospect) is 90.7% floating-rate.
As interest rates rise, the revenues from Prospects floating-rate interest-bearing assets will increase. At the same time, Prospect’s interest expense will remain essentially constant since most (99.9%) of its debt is fixed rate.
