Ainv Merx
Merx Aviation Finance is one of Apollo Investment's largest portfolio holdings. Image source: Merx.

Income investors are always looking for higher yields from their investments, and low interest rates have pushed many out of bonds and into stocks. One of the highest-yielding companies in the market is Apollo Investment (NASDAQ:AINV), but for those who've been burned by high-yield dividend stocks before, the question is whether Apollo can keep delivering cash to its shareholders over the long run.

When you look at the list of top-yielding stocks, Apollo is just one of several business development companies, alongside peers Prospect Capital (NASDAQ:PSEC) and Main Street Capital (NYSE:MAIN). Business development companies take advantage of a special tax-favored vehicle to eliminate paying taxes of their own, instead delivering the bulk of their income to shareholders who then must pay tax on their dividend distributions. Below we'll take a closer look at Apollo Investment and whether it's likely to keep paying its current dividend to shareholders.

Dividend Stats on Apollo Investment

Current Quarterly Dividend Per Share

$0.20

Current Yield

9.6%

Last Reduction in Dividend

2012

Earnings Payout Ratio

60%

Source: Yahoo! Finance.

What's next for Apollo Investment's dividend?
Apollo Investment has had a somewhat spotty dividend record in recent years. Before the financial crisis, Apollo had increased its dividend aggressively, with quarterly boosts that eventually topped out at $0.52 per share. But in 2009, Apollo slashed its payout by half, and further reductions near the beginning of 2012 set the dividend at its current level. Across the industries, BDCs such as Main Street and Prospect have had to overcome similar obstacles, but Main Street has grown its payout -- albeit at much lower dividend yields -- while Prospect sustained more of its dividend and now pays a higher yield than Apollo.

AINV Dividend Chart

AINV Dividend data by YCharts.

Part of the explanation for Apollo's falling payout involves a deliberate increase in asset quality. Over the past couple years, Apollo has emphasized secured loans, which make up the majority of the BDC's portfolio. Secured loans outnumber unsecured loans by roughly two to one, reversing the ratio from early 2012 when unsecured financing held the two-to-one lead. All other things being equal, interest rates on secured debt are lower than on unsecured loans, so the price of less volatility and risk is a smaller return.

Ainv Port

Source: Apollo Investment.

Moreover, Apollo has positioned itself to deal with expectations for rising interest rates. The business development company has steadily increased the amount of its portfolio that has floating-rate terms in its loans, setting the stage for automatic interest-payment increases if rates rise in the future. Only a small portion of Apollo's portfolio is in structured products and equity investments, helping it control risk.

Still, much of the company's future depends on the credit quality of Apollo Investment's portfolio. For instance, Apollo's stake in Merx Aviation Finance taps into the red-hot market for aircraft, with the health of the airline industry supporting lucrative lease and loan-interest payments for Merx and, by extension, Apollo. Other key holdings in areas ranging from private security to playground equipment show the breadth of Apollo's exposure to the health of the overall economy. As long as those areas remain strong, Apollo will at least avoid any catastrophic defaults that produce losses for its portfolio.

Will Apollo's dividend fall further?
One thing Apollo has going for it lately is that its earnings have been strong compared to its payouts. Even when you look only at net investment income per share, which excludes the portfolio capital gains and losses that are incorporated into earnings, Apollo has done well in recent quarters to bring in more income than it's paying at current levels. As a result, Apollo's existing payout appears sustainable, and a promising future might even allow for dividend increases in the long run.

Right now, Apollo Investment trades at almost a 5% discount to its most recently reported net asset value. If you have confidence that it can sustain its dividend, then Apollo looks well positioned to weather future problems and potentially provide a bit of a capital-appreciation boost to its lucrative income payouts.

Dan Caplinger 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.