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Prospect for High Returns
11/09/2015 7:00 am EST
Today, with T-bills yielding 0% and the 30-year Treasury Bond paying a paltry 2.82%, it’s no wonder income investors are looking outside conventional income streams to finance their lives, explains income expert Bryan Perry, editor of Dividend Investing Weekly.
While the stock market has enjoyed a nice rebound off the late September lows, many high-yield sectors remain at oversold levels.
Take for instance the Business Development Companies or BDCs. Some—because of exposure to energy or other factors—got crushed and now present investors with a real valuation proposition.
One name that comes to mind is Prospect Capital (PSEC) and its heady current yield of 13.3%.
The stock had been in a protracted downtrend for the past year due to fears of a couple of large holdings on the portfolio’s balance sheet.
Upon closer examination, a high-quality effort by management to de-risk the loan structure has led shares of PSEC to find very strong institutional support at the $7 level.
It is also a stock where insiders are piling in at these depressed levels. Going back to December 2015, insiders have purchased more than 1 million shares at $7.25-$9.25 per share.
The current price of $7.50 per share affords retail investors the same attractive entry point.
Prospect Capital is forecast to earn $1.03 per share for fiscal 2016 and the annual dividend payout is $1.00 per share, so the payout is 100% covered by interest income received from its loan portfolio after stripping out cost of operations.
Better yet, this is one of only a handful of BDCs that pay out a monthly dividend.
Certainly, there remains an element of inherent risk or the stock wouldn’t be yielding 13.3%. But the company is in a crucial quarter of righting itself with Wall Street.
If PSEC can post a sequentially good quarter similar to the most recent one, the shares finally will break above $8, where the 200-day moving average lies overhead.
Trading above $8 would send a serious buy signal. PSEC should be on every high-yield investor’s watch list, because when it does move above $8, it won’t be long thereafter before it trades 20% higher at $10.
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