Oxford Lane Capital (OXLC) is our Top Pick for more conservative income-minded investors in 2022; it carries a yield of +10% and is an income investor's dream, declares Rida Morwa, income expert and founding partner of High Dividend Opportunities.
OXLC is a Collateralized Loan Obligation, CLO, closed-end fund. This means two important things for income investors right out of the gate. The first is that as a CEF Oxford Lane must pay us 90% of its taxable earnings. Secondly, it invests in a type of assets that we cannot buy on our own.
CLOs are a bundle of loans that payout interest in a waterfall pattern to "tranche" holders. These loans are senior and secured, which means they rate first in the event of a default and are secured by all the assets in the company, providing a high degree of safety. Furthermore, they are loans to large middle-market companies, like American Airlines Group (AAL), or Lumen Technologies (LUMN).
So why do we love Oxford Lane for income?
1. OXLC is a bet on the continuous boom of the U.S. economy. We believe that the U.S. economy is a great shape, with consumers, corporations and banks sitting on a bubble of liquidity. This creates an ideal environment for capital investment and economic growth.
2. The stock yields +10%, and it is a monthly payer.
3. CLOs are about to have another banner year for performance. CLOs survived the Great Financial Crisis, posting strongly positive returns (unlike CDOs or MBS). They also saw record-low defaults in both 2020 and 2021, alongside record originations. Oxford Lane has exposure to 165 different CLOs, all generating them attractive income.
4. The company has been fast growing, fully covering their monthly distribution. It has already announced hiking its distribution effective January 2022.
5. We expect the potential for another distribution increase as Oxford Lane has multiple investments set to pay them new income as 2022 progresses.
6. The stock is very cheap at the current prices. Today, it's still one of the best opportunities in the market.
When it comes to a strong income investment, there are two-sides to the coin. Earnings is one, which Oxford Lane has done exceptionally well as growing larger. The other side is expenses. Oxford Lane is actively reducing their cost of capital by replacing higher rate debt with lower rate debt.
Oxford Lane in 2021 replaced a term preferred security with another yielding 150 basis points lower. This instant savings allows more of the valuable CLO income to fall to the bottom line and into our pockets with the newly raised monthly dividends.
Many of your life's bills come monthly, I love to have income arrive monthly as well. We love this high yielder with a growing dividend that is paid monthly and is directly tied to an asset class that is about to have another record year. The stock at the current price is very much undervalued and offers a unique buying opportunity. This could be one of your biggest winners in your high yield portfolio!
A Look Back at 2021's Top Performers
NEWT's upside is not the entire story. The stock went up by 49%, but you need to add the dividend paid during the year to get an accurate performance. The dividend yield on NEWT was at 10% at the time of our recommendation, and NEWT managed to hike it during the year. The total returns were actually 65% (which is 49% plus 16%)
The Business Development Company lends and invest in small and medium size U.S. businesses. Investing in NEWT was effectively a bet on the recovery of the U.S. economy. I follow my belief that one should never bet against America, and NEWT plays a big role in keeping it going!