Will You Get Taken by This ‘10.9%’ Dividend Yield?

The yield is certainly attractive to income investors.dividend yield

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What’s more, you’ll be able to collect dividends in monthly payments. The bills arrive monthly. It’s convenient when the dividends arrive that way, too.

That’s the income proposition that Prospect Capital Corp. (NASDAQ: PSEC), a business development company (BDC), offers new investors today.

But nothing is really new. The 10.9% dividend yield has been a hallmark of Prospect since it began trading publicly in 2004.

The management has always been keen to highlight the dividend, especially the cumulative amount, which was duly noted in the press release for quarterly financial numbers: “Prospect since inception through our October 2019 distribution will have distributed $17.52 per share to original shareholders, aggregating approximately $3 billion in cumulative distributions to all shareholders.”

Sounds like income nirvana . . . until we delve a little deeper and discover numbers that temper thoughts of income paradise.

It’s true. Your dividends would sum to $17.52 per share had you been invested with Prospect from day one (July 27, 2004) and you’re willing to hang around until at least Sept. 27 (when Prospect shares trade ex-dividend for the October payment).

But had you invested on day one, your dividend yield would be considerably less than 10.9% today. It would be only 4.8%.

What gives?

First, you would have paid at least $15 – the initial public offering (IPO) price – for each of your Prospect shares.

Prospect pays a $0.06 per share monthly dividend today. That’s $0.72 annually, which generates only a 4.8% yield on your cost basis.

Second, you would have endured a series of dividend “adjustments” had you been a first mover.

Adjustment number one occurred in 2010 when Prospect implemented its monthly dividend policy.

The last quarterly dividend was $0.41 per share before the policy change. The new monthly dividend was paid at $0.10. The dividend was effectively reduced 26.8%.

Some income ground was regained. Prospect increased its monthly dividend a couple of fractions of a cent.

A full cent increase was realized in December 2012 when the monthly dividend began being paid at $0.11 per share. (That noted, you would still be down 19.5% from your $0.41 per share quarterly dividend.)

The dividend was subsequently increased another fraction of a cent to $0.111 per share, and then came the decreases.

The monthly dividend was adjusted to $0.083 per share starting in February 2015. That’s another 25.2% less income for you.

We’re not done yet. Investors were hit with the next adjustment in September 2017 when the monthly dividend was reduced to $0.06 per share from $0.083.

And as the dividend goes, so goes the share price.

Your $15 initial investment is no longer worth that today.  Prospect shares trade at $6.57 each as I write.

So, yes, investors can receive a double-digit dividend yield on a new Prospect investment today, much like investors could with a new Prospect investment a decade ago.  Of course, we’re dealing with much lower numbers today compared with yesterday.

Perhaps, this time is different. The $0.06 per share monthly dividend will hold. It has proven durable (at least for the past two years).

I suspect that tomorrow will be like today and yesterday: Prospect Capital shares will always pay dividends that yield 10% or more on initial investments.

The question is the dividend amount that will be paid to generate that 10%-plus yield. The question is worth considering. After all, as the dividend goes, so goes the share price.

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Published by Wyatt Investment Research at