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PennantPark: Swinging for Yield

09/11/2014 8:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

After a few weeks of choppy trading, dividend stocks are back in a confirmed uptrend, notes Mark Skousen, editor of High Income Alert.

Business development companies (BDCs) are venture capital firms. They generally invest in small, enterprising businesses—making loans if necessary and offering consulting services for a fee—with the expectation that the business will increase in value.

Like real estate investment trusts (REITs), BDCs must distribute at least 90% of their net income to shareholders each year.

That means you can see both heady growth and fat dividends, exactly what we look for in this service.

So, I am now adding PennantPark Investment (PNNT). Based in New York City, PennantPark’s primary focus is lending money to mid-sized companies (with annual sales of $10 million to $1 billion) that are well managed, undervalued, and cash-flow positive.

Approximately half of its more than $1 billion portfolio is invested in first and second lien secured debt. (This is a solid position. If a company goes into liquidation, secured lien holders get paid in full before equity owners or other creditors get their first dime.)

PennantPark takes a broadly diversified approach, with holdings in utilities, oil and gas, electronics, and publishing. In its more-than-seven-year history, 97% of PennantPark’s loans have been repaid with interest.

As a result, cash flow here is high and PennantPark has never cut its dividend. The current yield is a whopping 11%.

I notice, too, that insiders also have been buying the stock earlier this year. It wouldn’t be a bad idea to follow their lead.

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