Up to date on March 4th, 2023 by Samuel Smith

Because the saying goes, if one thing seems to be too good to be true, it often is simply that. This could typically be utilized to unusually high-yielding dividend shares, lots of which have to chop their dividends in a recession.

For instance, Stellus Capital Funding Corp. (SCM) has an over 10.5% dividend yield, which could be very enticing on the floor. The S&P 500 Index, on common, has a dividend yield of simply 1.6%.

Not solely that, however Stellus pays its dividend every month, relatively than every quarter like most corporations. This helps to make Stellus stand out, as we at the moment cowl simply 69 month-to-month dividend shares.

You possibly can obtain the total listing of month-to-month dividend shares (together with vital monetary metrics reminiscent of dividend yields and payout ratios) by clicking on the hyperlink under:

 

Nonetheless, whereas excessive dividend shares are very interesting in a comparatively low-rate surroundings, buyers should ensure that the dividend is sustainable.

Stellus has a really excessive payout ratio close to 100%. As a BDC, Stellus is required to distribute basically all of its revenue, so its payout ratio will all the time be excessive. Nonetheless, it’s in buyers’ finest pursuits to fastidiously monitor the corporate’s earnings efficiency for indicators {that a} lower within the distribution could also be coming.

This text will talk about Stellus’ fundamentals as they pertain to supporting its over 10.5% dividend yield.

Enterprise Overview

Stellus is a Enterprise Growth Firm, or BDC. It makes investments in small, predominantly personal corporations which can be often at an early stage of their development cycles.

Stellus is a middle-market funding agency and makes fairness and debt investments in personal middle-market corporations. The corporate offers capital options to corporations with $5 million to $50 million of EBITDA and does so with a wide range of devices, nearly all of that are debt.

Stellus offers first lien, second lien, mezzanine, convertible debt, and fairness investments to a various group of consumers, typically at excessive yields, within the US and Canada.

Supply: Investor Presentation

It additionally has a extremely diversified funding portfolio, each geographically and by way of business focus. Stellus will make a wide range of debt investments, together with first lien, second lien, uni-tranche, and mezzanine financing.

The investments are positioned in a wide range of industries, together with enterprise providers, industrial, healthcare, know-how, power, client merchandise, and finance. Invested capital is used for a variety of functions, together with acquisitions, development investments, and extra. Stellus is externally-managed, by Stellus Capital Administration LLC, a registered funding advisor.

The corporate follows a disciplined funding technique. In prior years, it closed solely about 2% of offers reviewed. Its relative selectiveness permits the corporate to give attention to the highest-quality investments.

It additionally means the corporate has way more funding alternatives than it wants, enhancing its potential to pick solely the most effective investments. Stellus generates significantly excessive yields from its first lien, second lien, and unsecured debt investments.

Subsequent, we’ll check out the corporate’s development prospects.

Development Prospects

A robust catalyst for Stellus is its rising funding portfolio. Stellus has seen its funding portfolio rise at a speedy tempo over the previous 5 years, which has allowed the corporate to earn greater funding revenue.

Nonetheless, this all stopped in 2020 because the coronavirus pandemic despatched the U.S. financial system right into a deep recession, negatively impacting lots of Stellus’ investments.

The excellent news is that the corporate’s outcomes appear to have stabilized. Stellus reported fourth-quarter and full-year earnings on March 1^st, 2023. For the years ended December 31, 2022 and 2021, the corporate reported web funding revenue of $28.6 million ($1.46 per widespread share based mostly on weighted common widespread shares excellent of 19,552,931) and $19.8 million ($1.01 per widespread share based mostly on weighted common widespread shares excellent of 19,489,750), respectively.

The corporate additionally reported core web funding revenue, which is a non-U.S. GAAP measure that excludes the capital positive factors incentive price and revenue tax expense accruals. For the yr ended December 31, 2022, core web funding revenue was $26.9 million or $1.38 per share. For the yr ended December 31, 2021, it was $23.7 million or $1.22 per share.

Dividend Evaluation

So far as dividend shares go, Stellus will not be a typical alternative. It has a comparatively quick dividend historical past of fewer than 10 years, which suggests it has not but developed an extended observe document of consistency.

You possibly can see a picture of the corporate’s distribution historical past under:

Supply: Investor Presentation

Stellus at the moment pays a month-to-month dividend of $0.1333 per share, equating to an annualized payout of $1.5996. The corporate lower its dividend in mid-2020 as a result of pandemic. On a optimistic word, Stellus frequently pays out particular distributions to additional complement its enticing month-to-month dividend.

Web funding revenue is anticipated to come back in at $1.78 per share for 2023. With the present annualized dividend of $1.5996, Stellus is at the moment carrying a payout ratio of 90%. This implies the present dividend payout is sustainable, however simply barely. Have in mind BDCs are required to distribute practically all of their revenue, so Stellus’ payout ratio will all the time be excessive.

Even so, the corporate doesn’t have a lot wiggle room. Even a modest decline in funding revenue may trigger the payout ratio to rise above 100%, which indicators a probably unsustainable dividend.

Stellus should proceed to extend its investments, as its latest outcomes point out. Stellus is a high-risk, high-reward dividend inventory. If the corporate’s development stays on observe, buyers will obtain a ~10.5% return simply from the dividend, plus any capital appreciation from a rising share worth.

Even when the corporate does keep its dividend, buyers mustn’t anticipate a lot by way of dividend development going ahead. Web funding development has been sluggish and given the excessive payout ratio, we don’t see any catalysts for the next payout within the close to future.

Remaining Ideas

Stellus might be a horny decide because it has a ten.58% dividend yield and a few measure of development potential.

Plus, Stellus pays its dividend every month, which helps enhance the compounding impact of reinvested dividends and enhances the attractiveness of the inventory for these relying upon dividends for dwelling bills.

In fact, there is no such thing as a assure the corporate’s development plans will likely be profitable and with a payout ratio nearing 100%, there may be not a lot room for error. Consequently, buyers should settle for the danger of a future dividend lower if monetary outcomes deteriorate. Solely buyers prepared to take this danger ought to think about shopping for the inventory.

If you’re fascinated with discovering extra high-quality dividend development shares appropriate for long-term funding, the next Certain Dividend databases will likely be helpful:

The most important home inventory market indices are one other strong useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month: