A reader recently emailed me to ask my thoughts on a private investment opportunity that would pay him 10% in the first year and 16% to 20% in years two and three – with low risk.
I am not permitted to give personalized advice, so I didn’t analyze the deal. But I reminded him that there’s no such thing as a “low risk†double-digit yield.
If it was truly low risk, the company wouldn’t have to pay 10% to borrow cash. It could pay 5% or even 7%.
Remember this: the higher the yield, the higher the risk. There are no exceptions, no matter what a slick salesperson says.
It’s true in the markets as well. Stocks with double-digit yields are riskier than lower-yielding companies, like Coca-Cola (NYSE: KO).
Keep that in mind this week as I look at a stock yielding 11.5%. Its dividend has been stable, and the company can actually afford to pay such a high yield.
Gladstone Capital (Nasdaq: GLAD) is a business development company (BDC) that lends money to a wide variety of small businesses with sales of $20 million to $150 million.
Its portfolio of companies includes…
- Alloy Die Casting Corp. – A Buena Park, California, maker of aluminum and zinc products
- Lignetics Inc. – A manufacturer and distributor of wood pellets and fire logs for home and industrial heating based in Sandpoint, Idaho
- Sunshine Media Holdings – A media company focused on healthcare and financial services publications. Sunshine is located in Chattanooga, Tennessee.
Gladstone had a rough year in 2008. The company had to slash its monthly dividend in half in April 2009 (right at the market bottom). Since then, it has paid the same $0.07 per share dividend every month. It also previously cut its dividend in 2003.
But over the past seven years, Gladstone has kept its dividend stable without reaching to pay it. The company’s net investment income was $0.84 per share last year, exactly enough to cover its dividends.
