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At Prospect Capital, Why I Voted Against My Interests

Most of the time, I'm a control freak when it comes to investing. Most of the time, but not always. Prospect Capital (Nasdaq: PSEC  ) is that sort of exception, a publicly traded business development company (BDC) that holds its annual meeting of shareholders on Dec. 7 in New York.

As a shareholder, I've voted seemingly against our interests and agreed to allow management to issue new shares at prices below Net Asset Value (NAV). Think of it like discounting. Prospect is asking for the right to sell on the cheap in order to raise cash quickly.

If that sounds like an awful strategy for investors betting on a steady increase in the value of Prospect's equity, you're right. So why go along with it? Strong performance and insider buying tell me management has earned the right to be trusted. Find out more in the video below.

With a juicy 11% yield as of this writing, Prospect Capital is a potentially lucrative income play. And yet you don't need alternative investments in order to enjoy healthy dividends. Everything you're looking for is in the Fool's brand-new special report: The 3 Dow Stocks Dividend Investors Need. It's absolutely free, so just click here and get your copy today.

Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2012, at 8:28 PM, 1caflash wrote:

    Tim, thanks for the comments and the video. I agree with you, and my shares were voted accordingly. Reading the last conference call transcript made available through Seeking Alpha, I understand that Prospect Capital indicated it wants to protect the monthly dividend, while continuing to seek investment opportunities. One thing folks tend to forget is that by dividend reinvesting the shares each month, there is a compounding advantage over stocks that pay quarterly. As a retiree looking for income, I have gradually added PSEC shares during dilution periods.

  • Report this Comment On November 29, 2012, at 12:05 PM, paultaut wrote:

    Personally, I believe that taxes on dividend income will rise, possibly dramatically.

    But what would you prefer if they do so?

    For myself, the higher the yield the better to mitigate the effect of that hike and , in Prospect's case, I believe the yield will go down as Insitututional investors finally get involved.

    For that interest to increase, a company should not be a small cap which PSEC was a few years ago and it should have liquidity so that large purchase/sell orders do not affect the price unduly.

    I expect that eventually, you will see a sub 10% yield.

  • Report this Comment On November 29, 2012, at 1:25 PM, surfgeezer wrote:

    Well we voted opposite. You said it correctly- it is against your interest's. Their NAV is steadily increasing, by definition their job and why I invested. So if the market is under valuing them, WHY would it be a good time to dilute ? Market does what it does- swing prices, the only real benefit would be to the people that get a salary on %.

    Mine was a no.

  • Report this Comment On November 30, 2012, at 9:37 AM, megastockmaster wrote:

    Allied Capital. American Capital. That is why you should permit BDCs to issue secondaries below NAV.

    If you allow them, the worst case is that they issue shares under NAV for circumstances which do not seem good to you. Share price dips 10-15%. You think they might reduce their dividend. You can sell.

    If you do not allow them, the worst case is that they cannot issue more shares in order to do business [this is how BDCs do business, by the way]. Due to loan covenants, they cannot extend their loans [revolvers] and might be listed in default by banks. They need cash, but they cannot access it. Share value dips 50%+. They are at risk of BK. Share price keeps dropping. They cannot pay the dividend, even though their NII is good enough for a dividend, due to bank covenants. Maybe somebody buys them or maybe the stock value languishes while they struggle to survive without paying dividends. Believe me: once the market gets a whiff of "we can't raise capital", the selloff is faster than most retail guys can react to. Institutions would be your competitors in getting out the door.

    Don't give the market a whiff of "we can't raise capital". Vote for your interests as a shareholder and permit management to have the ability [which they generally do not exercise] to issue shares under NAV.

  • Report this Comment On December 03, 2012, at 5:11 PM, growthguy wrote:

    Allow them to do it if needed for future loans. I trust this management to do the right thing. My problem is that we are not experiencing a move up in pps,I guess do to the huge recent 35M share deal that has not been placed well in wrong hands,so despite good earnings and increasing dividends,no large institutional investors are visible at this time. Main Street Capital MAIN has moved from $18 to $12.90 in 12 months. Your thoughts?

  • Report this Comment On December 07, 2012, at 3:58 PM, bobobz wrote:


    According to Yahoo Finance, MAIN is at $30.00 today. What are you talking about?

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