3 Convincing Reasons to Add Prospect Capital Corporation to an Income Portfolio

Prospect Capital is an interesting bet on high recurring income as well as continued earnings growth while offering investors a reasonable valuation.

Aug 28, 2014 at 2:03PM

Source: Prospect Capital.

Prospect Capital (NASDAQ:PSEC) is a well-run finance company with a convincing earnings and asset growth record. The company is funneling back substantial amounts of cash to shareholders in the form of dividends, and it could be an interesting addition to income-oriented investment portfolios.

Prospect Capital operates in sort of a niche market, providing financing for North American middle-market companies with annual EBITDAs between $5 million and $150 million. Prospect Capital provides both flexible private debt and equity capital and competes on one hand with traditional banks as well as with private equity businesses on the other.

The company is structured as a business development company (BDC), which requires the business to pay out most of its earnings to shareholders.

Similar to real estate investment trusts or master limited partnerships, BDCs are preferred income vehicles for investors who want to accentuate dependable income. Since BDCs distribute large amounts of cash to shareholders, the value of investing in a BDC practically lies in receiving high, recurring income while capital appreciation potential is somewhat limited compared to companies that retain profits and deploy capital toward high-ROE reinvestment opportunities.

Three reasons in particular stand out as to why investors should consider an investment in Prospect Capital.

1. High dividend yield
Prospect Capital offers investors a diversified investment portfolio with which it generates high levels of net investment income. This income is distributed to shareholders in the form of juicy dividends.

Prospect Capital has the highest dividend yield in the BDC space and has successfully defended its top position as a dividend champion over the last 12 months compared to its closest peers, Ares Capital Corporation (NASDAQ:ARCC) and Apollo Investment Corporation (NASDAQ:AINV).


The dividend yield comparison above is based on a trailing-12-month period. Prospect Capital's forward dividend yield -- the yield that buyers will get today on an annualized basis if they purchased the company and Prospect Capital upheld its latest dividend payment -- stands at a massive 12%.

2. Growth record
Business development companies generally had a good run over the last couple of years, and they were the primary beneficiaries of a cutback in lending activity of large-cap banks amid the financial crisis.

Prospect Capital benefited from explosive growth in assets and earnings over the last five years and should be able to continue to capitalize strongly on its increased market presence and visibility in the BDC space.


Source: Prospect Capital investor presentation August 2014.

3. Moderate net asset value
I generally like to invest in industry leaders. With a market capitalization of $3.7 billion, Prospect Capital is not No. 1 in the market -- Ares Capital is with a market capitalization of $5.3 billion -- but the No. 2 spot is still pretty good.

Prospect Capital's valuation has seen both discounts and premiums to book value in the past, but it now trades about in line with book value.


With just a 2% premium to its net asset value, Prospect Capital is not too expensive yet compared to its historical valuation: Investors can still invest in the second-largest industry player at a reasonable valuation.

The Foolish bottom line
Prospect Capital is an interesting high-yield income vehicle for investors who want to benefit from a 12% dividend yield and want to bet on continued growth of the BDC in its financing niche.

As laid out above, investors should expect the majority of total returns to come from Prospect Capital's regular cash distributions instead of capital appreciation.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool recommends Apollo Investment. 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