Up to date on October twenty fourth, 2025 by Bob Ciura
Enterprise Improvement Corporations — or BDCs, for brief — permit buyers to generate revenue with the potential for sturdy complete returns whereas minimizing the tax paid on the company degree.
Regardless of these benefits, buyers usually keep away from enterprise growth corporations. This can be because of the tax implications of their distributions for his or her shareholders. However even with the added headache come tax time, BDCs can nonetheless be worthwhile for revenue buyers.
Prospect Capital Company (PSEC) is likely one of the extra enticing enterprise growth corporations available in the market right now.
Prospect stands out from the group in that it pays month-to-month dividends, giving its shareholders a gentle and predictable passive revenue stream, which is extremely interesting to revenue buyers.
There are presently simply 78 month-to-month dividend shares. You’ll be able to obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter, like dividend yield and payout ratio) by clicking on the hyperlink under:
Prospect Capital’s dividend yield is over 19%, greater than ten instances that of the common S&P 500 Index. Our full checklist of shares with 5%+ dividend yields is right here.
Prospect’s excessive dividend yield and month-to-month dividend funds are two of the explanation why the corporate deserves additional analysis. This text will focus on the funding prospects of Prospect Capital Company intimately.
Enterprise Overview
Prospect Capital Company is a Enterprise Improvement Firm based in 2004. It is likely one of the largest, with a market cap of virtually $1.3 billion.
Prospect Capital is a number one supplier of personal fairness and personal debt financing for middle-market corporations, broadly outlined as an organization with between 100 and a couple of,000 staff.
Prospect Capital advantages from working within the center market as a result of it lacks competitors from bigger, extra established lenders.
Supply: Investor Presentation
Center-market corporations are usually too small to be prospects of economic banks however too massive to be served by the small enterprise representatives of retail banks. Prospect Capital does enterprise within the “candy spot” between these two companies. This lack of competitors on this sector has allowed Prospect Capital to finance some really enticing offers.
Traders ought to be aware that Prospect Capital is extremely uncovered to unstable rates of interest. It’s because the corporate’s liabilities are almost all at fastened charges, whereas its investments are almost all floating-rate devices. Which means curiosity expense is basically fastened, whereas curiosity revenue rises and falls commensurately with prevailing rates of interest.
As rates of interest rise, the revenues from Prospects floating-rate interest-bearing belongings will enhance. On the similar time, Prospect’s curiosity expense will stay fixed since most of its debt is fastened. After all, the alternative is true, as falling charges usually imply declining curiosity revenue.
This makes Prospect Capital a terrific portfolio hedge in opposition to interest-sensitive securities like REITs and utilities, however it underperforms when charges are very low and when charges are declining.
Prospect Capital’s versatile origination combine can be a significant constructive from an investor’s perspective, provided that the big variety of devices it makes use of to provide revenue helps it discover the most effective alternatives.
The corporate has many various methods to speculate with goal corporations, together with several types of debt and fairness. All of them have totally different danger ranges and charges of return.
Prospect Capital’s willingness to hunt out the most effective devices — and having the size to take action — is a significant benefit over different middle-market BDCs. The corporate’s funding technique is central to its long-term progress.
Development Prospects
Prospect Capital’s progress prospects stem largely from the corporate’s potential to:
Increase new capital through debt or fairness choices
Make investments this new capital in deal originations with an inside charge of return greater than the price of capital raised in Step 1
Prospect’s potential to supply new offers that supply acceptable risk-adjusted returns is a very powerful a part of this course of.
Happily for the corporate (and its buyers), there isn’t any scarcity of recent offers for Prospect’s consideration. The corporate has 1000’s of deal alternatives annually, permitting it to be very selective in its funding decision-making.
Prospect posted fourth quarter and full-year outcomes on August twenty sixth, 2025, and outcomes have been weak as soon as once more as the corporate continues to battle. Internet curiosity revenue for the quarter was 17 cents per share. NII was down from 25 cents from the identical interval a yr in the past. Whole income plummeted 21% year-over-year to $167 million.
Whole originations have been $271 million, up from $196 million within the prior quarter. Whole repayments and gross sales have been $445 million, up from simply $192 million in Q3. Internet originations, then, fell from $4 million in Q3 to -$175 million within the ultimate quarter of the yr, shrinking the corporate’s portfolio to $6.67 billion. That’s down from $7.72 billion a yr in the past.
Annualized present yield for all investments rose to 9.6% from 9.2% in Q3, however decrease from 9.8% a yr in the past. Nonaccrual loans have been 0.3% of complete belongings from 0.6% in Q3. NAV was $6.56 per share, down from $7.25 in Q3 and $8.74 in final yr’s This fall.
Dividend Evaluation
Prospect Capital’s dividend is the plain purpose buyers would select to personal the inventory, so it’s essential that the dividend is as protected as doable. As a BDC, Prospect Capital has no selection however to distribute basically all of its taxable revenue to shareholders. Due to this, its payout ratio will at all times be very excessive and typically variable.
In different phrases, the dividend is definitely coated by web funding revenue and has been for a while, which means the payout must be comparatively protected, barring a large affect from any potential financial downturn.
The corporate has declared 4.6 billion in cumulative distributions to shareholders since its IPO.
Clearly, the draw for Prospect Capital is in its potential to generate money to return to shareholders, and over time, it has executed that nicely.
The dividend seems protected for now, however buyers ought to repeatedly monitor the corporate’s web funding revenue for any indicators of hassle that might doubtlessly result in additional cuts down the street.
Associated: 3 Causes Why Corporations Lower Their Dividends (With Examples)
Ultimate Ideas
Prospect Capital’s excessive dividend yield and month-to-month distributions are two of the primary causes an investor would possibly take an curiosity on this inventory.
Taking a more in-depth look reveals that this BDC has a high-caliber management group and has positioned itself to thrive in most environments.
Nevertheless, the dividend seems to be on shaky monetary floor, which means Prospect is barely value a search for these buyers looking for excessive ranges of present revenue and month-to-month funds, plus abdomen the inherent dangers of proudly owning a BDC.
Don’t miss the assets under for extra month-to-month dividend inventory investing analysis.
And see the assets under for extra compelling funding concepts for dividend progress shares and/or high-yield funding securities.
Thanks for studying this text. Please ship any suggestions, corrections, or inquiries to help@suredividend.com.
