Updated on August 29th, 2024 by Bob Ciura
Business development companies, or BDCs, are an attractive investment vehicle for those focused on generating income. They generally distribute most of their earnings to shareholders and, as a result, typically have very high yields.
Gladstone Capital Corporation (GLAD) is a BDC with a current dividend yield of nearly 9%. It is one of more than 200 stocks with a 5%+ dividend yield.
You can see the full list of established 5%+ yielding stocks here.
And, including Gladstone Capital, there are 78 stocks that pay dividends each month, versus the more traditional quarterly or semi-annual payment schedules.
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
Gladstone Capital’s dividend yield towers above the rest of the market. The S&P 500 Index, on average, has a dividend yield of just 1.3%.
But a high yield is not enough if the underlying business is weak or the dividend is at risk of being cut. This article will discuss whether or not Gladstone Capital is a good investment option for income investors.
Business Overview
Gladstone Capital operates as a Business Development Company and invests in debt and equity securities, generating income primarily from its debt investments.
These investments are made via a variety of equity (10% of portfolio) and debt instruments (90% of portfolio), generally with very high yields. Loan size is typically in the $7 million to $30 million range and has terms of up to seven years.
Gladstone Capital chooses targets in stable industries with sustainable margins and cash flows and favorable growth characteristics.
The company focuses on non-cyclical and non-financial companies in order to avoid peaks and valleys in its target companies’ earnings. These are companies with leadership positions in their respective industries, growth potential, and annual EBITDA between $3 million and $15 million.
In order for Gladstone Capital to keep paying its hefty dividends to shareholders, which is its stated goal, it is critical that its investment portfolio continues to generate interest and dividend income and capital gains in excess of its operating and financial expenses.
It has a diversified portfolio, both in terms of deal sourcing and industry groups.
Equity investments include preferred or common stock. Gladstone Capital seeks to maintain a 90%-10% split between debt investments and equity investments.
Gladstone posted third quarter earnings on August 7th, 2024, and results were better than expected on both the top and bottom lines. Net investment income was 57 cents per share, which was four cents better than estimates.
Total investment income was $25.69 million, which was up almost 13% year-over-year, and was almost a million dollars better than expected. Total investment income was driven primarily by higher dividend income and an increase in prepayment fee income.
Total expenses rose fractionally, but the increase was negligible compared to the boost in revenue, leading to better profit margins and higher earnings.
Net increase in net assets resulting from operations was $19.1 million, or 88 cents per share, resulting from a $3.4 million gain in net unrealized appreciation, and $3.3 million in net realized gains.
Thanks to its robust investment strategy, the company has considerable growth opportunities to look forward to.
Growth Prospects
One of the most compelling growth catalysts for Gladstone Capital is rising interest rates. The company stands to benefit from higher interest rates because the majority of its debt portfolio is in variable-rate securities.
Looking further back, Gladstone has had a difficult time generating growth. Gladstone’s share issuances have funded higher NII in dollar terms but haven’t earned enough above its cost of capital to move the needle on NII-per-share. Given this history, we estimate Gladstone’s annual growth rate at 2% for the next five years.
The yields on the company’s portfolio influence its ability to earn income and, therefore, cover its expenses and pay distributions to shareholders.
Gladstone Capital will aim to continue growing its new investments and adding new companies to the total portfolio. Over time, the company’s portfolio yield has drifted higher to 14%.
Despite the cost of funding rising as well, Gladstone has managed to increase its yield spreads. Gladstone’s portfolio continues to grow in dollar terms, and the higher spreads on a larger portfolio is leading to earnings growth.
Dividend Analysis
Gladstone Capital pays a monthly dividend, which allows shareholders to receive 12 dividend payments per year, more frequently than four quarterly distributions.
GLAD currently pays a monthly dividend of $0.165 per share. Monthly payouts have now grown larger than their pre-pandemic levels.
The annualized dividend payout of $1.98 per share represents a current dividend yield of 8.7%.
We believe that Gladstone Capital’s current dividend is sustainable. Gladstone Capital has a solid track record of steady payouts, even during the Great Recession of 2008-2009. The company can maintain its high yield thanks to its tax classification and its favorable fundamentals.
BDCs are required to distribute at least 90% of any taxable income. This eliminates income tax at the corporate level, allowing capital gains to be passed through to shareholders, similar to a REIT.
With a projected dividend payout ratio of 98% for 2024, Gladstone Capital’s dividend payout appears to be secure but without much cushion. BDCs will always have high payout ratios due to the tax rule of distributing nearly all of their income, but overall the dividend coverage is tight.
This means the company may not be able to sustain a major economic downturn and maintain its dividend. As a result, were another significant financial crisis to occur, Gladstone Capital’s dividend could be in jeopardy.
Assuming continued economic growth, its dividend appears to be sustainable. But the high payout ratio introduces a relatively high risk to the sustainability of the dividend, particularly during a recession.
Final Thoughts
Investors should approach high dividend yields with caution. High yields are commonplace in the BDC asset class, but many have cut their dividends over the past few years.
For its part, Gladstone Capital reduced its dividend modestly in 2020 but has since grown it above its pre-COVID level. For the time being, we do not believe another dividend cut is imminent.
However, investors will need to pay close attention to the company’s future earnings reports. It has a very tight payout ratio, and any significant deterioration in the performance of its investment portfolio could threaten the dividend.
Overall, Gladstone Capital is likely only attractive for income investors looking for high yields.
Don’t miss the resources below for more monthly dividend stock investing research.
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 5%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more