1 High-Yielding Stock to Buy Now

Fifth Street Finance reported excellent results in its first fiscal-quarter earnings. Investors aren't giving it enough credit.

Feb 8, 2014 at 6:30AM

I'm impressed.

In December, Fifth Street Finance (NASDAQ:FSC) finally succumbed to its inability to pay its dividend. It slashed its monthly dividend to $0.05 per share, with the goal of paying out just $0.083 per month in 2014.

Shareholders weren't exactly happy with the news. The new dividend payout represented a 13% cut, but it was necessary -- Fifth Street Finance had been paying more than it was taking in. Now, earnings show it was the right call.

Balancing the business
Investors had reason to worry about Fifth Street Finance and its ability to pay a consistent dividend. When Prospect Capital (NASDAQ:PSEC) reported earnings last week, management noted that interest rates in the sponsor-led buyout business had dropped. This is where Fifth Street Finance sources most of its deals.

However, the fourth quarter proved to be big for Fifth Street. The company reported net interest income of $0.26 per share, exceeding its $0.25 quarterly dividend rate, and a whopping $912.7 million in new originations. Fifth Street originated loans equal to more than one-third of its balance sheet in just one quarter.

The calendar year fourth quarter is historically Fifth Street's best time for originations, as deals get done before year end. Unlike other business development companies, Fifth Street Finance originates most of its lending volume from private equity sponsors. When private equity is busy, so, too, is Fifth Street Finance. Prior quarters revealed lower private equity-led deals, and investors unfairly punished the BDC for light origination volume.

The next step
Investors have yet to give Fifth Street Finance the valuation bump it deserves. Shares currently trade below net asset value, despite the fact that Fifth Street has shown it can earn its new monthly dividend.

Yielding more than 10% per year, Fifth Street Finance looks like a balanced risk-reward BDC. The company reported in its press release that its average credit was levered at fewer than five times earnings before taxes, interest, depreciation and amortization, or EBITDA, well below the middle-market norm.

Investors should remember that the quality of a lending portfolio rarely shows itself during bull markets and periods of easy credit. It shows itself in downturns. So while Fifth Street isn't knocking the ball out of the park when it comes to yields, it's also not participating in riskier mezzanine debt investments.

New developments, like a senior secured lending program similar to that of Ares Capital (NASDAQ:ARCC), make for interesting conference call developments. Investors will have to watch this develop in future quarters, but it could deliver higher yields to Fifth Street, and only strengthen the dividend going forward.

At a yield of more than 10%, Fifth Street Finance is a compelling income play. A price lower than the company's net asset value is just icing on the cake. 

Is Fifth Street the best dividend stock you can buy?
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks, as a group, handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks, in particular, are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information