Updated on April 26th, 2022 by Felix Martinez
Investors looking for high yields might consider buying shares of Business Development Companies, or BDCs for short. These stocks frequently have a higher dividend yield than the broader stock market average.
Some BDCs even pay monthly dividends.
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:
Oxford Square Capital Corporation (OXSQ) is a BDC that pays a monthly dividend. Oxford Square is also a very high-yielding stock, with a yield of more than 10.4% based on expected dividends for 2022. This is more than 7 times the average yield of the S&P 500.
However, investors should always keep in mind that the sustainability of a dividend is just as important (or more important) than the yield itself.
BDCs often provide high levels of income, but many (including Oxford Square) have trouble maintaining their dividends, particularly during recessions. This article will examine the company’s business, growth prospects and evaluate the safety of the dividend.
Oxford Square Capital Corp. is a BDC (Business Development Company) specializing in financing early and middle–stage businesses through loans and CLOs. You can see our full BDC list here.
The company holds an equally split portfolio of First–Lien, Second–Lien, and CLO equity assets spread across 8 industries, with the highest exposure in business services and healthcare, at 33.5% and 23.8%, respectively.
Source: Investor presentation
The company’s assets have a gross investment value of around $433 million in 53 positions, with 7.7% of debt securities being secured. OXSQ generates around $34 million in annual interest payments.
On March 3rd, 2021, Oxford Square reported its Q4 results for the quarter that ended December 31st, 2021. The company generated approximately $10.4 million of total investment income, an increase of 4.1% compared to the previous quarter and 18.6% higher on a year-over-year basis.
The growth was attributed to a larger debt and CLO equity portfolio, despite the declining rates over this period, which affected the company’s investment yields. The weighted average yield of its debt investments was 7.7% at the current cost, compared to 7.5% during Q3-2021
Cash income from its CLO equity investments also saw increasing yields, from 19.6% to 21.2% during this period. Total expenses, which primarily include interest paid on its own financing and managers’ fees, amounted to $5.7 million, 1.7% lower compared to Q3 2021.
As a result, NII (net investment income) amounted to around $4.5 million, or $0.09/share, with stable QoQ. Net asset value (NAV) per share was $4.92 compared to $5.03 in the previous quarter.
Assuming management does not intend to over–distribute, as has been the case in the past, which has led to a deteriorating NAV, we expect this year’s IIS/share to be around $0.30.
Source: Investor presentation
The company’s investment income per share has been declining at a 10–year CAGR of 913%, as financing has become cheaper, preventing Oxford Square from refinancing at its previously higher rates. Additionally, the company has been historically over–distributing dividends to shareholders, decaying its NAV, and therefore, future income generation due to fewer assets.
Considering that the Fed has made it clear that they intend to increase rates this and next year, we find that Oxford Square will be able to return to its previously gross interest generated. However, we expect IIS & DPS to remain stable in the medium term.
The 2020 dividend cut should result in Oxford Square retaining some cash, hopefully starting to regrow its NAV. With rates unlikely to continue moving any lower, income generation should stabilize over the next few years
With investment across a wide breath of different industries, Oxford Square has a fairly balanced portfolio. The company’s top three industries do make up most of the portfolio, but they are in different areas of the economy. This adds some protection in case of a downturn in one industry.
However, with rates declining over time, the company’s receivables have been further pressurized, worsening its financials annually. Overall, we believe that the company’s future investment income generation carries substantial risks, while a potential recession and an adverse economic environment could severely damage its interest income.
Oxford Square only recently began paying a monthly dividend, with the first being distributed in April 2019. Total dividends paid over the past few years are listed below:
- 2015 dividends: $1.14
- 2016 dividends: $1.16 (1.8% increase)
- 2017 dividends: $0.80 (31% decline)
- 2018 dividends: $0.80 (no increase)
- 2019 dividends: $0.80 (no increase)
- 2020 dividends: $0.6120 (23.5% decline)
- 2021 dividends: $0.42 (31.4% decline)
Shareholders received a small increase in 2016, followed by three large dividend reductions since 2017. This inconsistency in dividend payout is due to the company’s volatile financial performance.
Oxford Square currently pays a monthly dividend of $0.035 per share, equaling an annualized payout of $0.42 per share. This would represent a decline of 31% for dividends in 2021.
Based on a full-year payout of $0.42 per share, Oxford Square stock yields 10.4%. While the dividend cut is large, the dividend yield remains very high. But investors should not focus solely on yield; dividend safety is an important consideration for income investors, and in that regard, Oxford Square leaves a lot to be desired.
Using our expectation for full-year investment income per share of $0.30 for 2022, the company is projected to maintain a dividend payout ratio of 140% for 2022. This could result in another dividend cut if its investment income declines from current levels.
Oxford Square has a solid business model, with diversification across investment assets and industries. The company has also taken steps to build up its less risky asset position while decreasing its reliance on riskier CLOs.
That said, Sure Dividend recommends that risk-averse investors avoid Oxford Square. We believe that the dividend does not offer enough safety. The company distributes essentially all of its investment income, leaving little wiggle room. Any drops in investment income can (and have) result in dividend cuts, such as last year.
We echo these concerns and rate Oxford Square a Sell.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: