This Stock Pays a 12% Dividend Yield and May be an Attractive Buy at These Levels

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Written By Jackson Hartwell

Stellus Capital Investment Corporation has been recognized for its strong potential in generating passive income, particularly following a recent pullback in its stock price.

This business development company (BDC) has demonstrated resilience by covering its dividend with net investment income in the first quarter of 2024, despite a slight increase in the payout ratio.

The company’s exposure to a high percentage of floating-rate loans positions it well to benefit from a higher-for-longer interest rate environment, further solidifying its appeal.

Portfolio Review

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Stellus Capital Investment Corporation is structured as an externally-managed BDC under the Investment Company Act of 1940. Its primary investment focus is on middle-market companies, typically privately held, with annual EBITDA ranging from $5 million to $50 million.

As of March 31, 2024, Stellus Capital Investment reported an investment portfolio valued at $875.9 million, with the majority being Senior Secured First Liens. Senior Secured Loans, including First and Second Liens, collectively amounted to $794.8 million, or 91% of the total portfolio value. The portfolio value saw a modest increase of $1.4 million compared to the previous quarter.

One notable feature of Stellus Capital Investment is its strategic positioning to benefit from interest rate hikes. With 98% of its loans being floating-rate, the company stands to gain from an environment where inflation persists and interest rates remain high.

Should inflation continue above 3%, it is likely that the central bank will maintain elevated interest rates, benefiting Stellus Capital Investment’s net investment income growth in the latter half of 2024.

Financial Performance

In the first quarter of 2024, Stellus Capital Investment earned $26.0 million in total investment income, marking an 8% year-over-year increase. Net investment income was reported at $10.2 million, a 13% increase from the previous year, bolstered by strong non-interest income sources and an income incentive fee waiver.

Despite the central bank’s reluctance to lower interest rates, Stellus Capital Investment is well-positioned to thrive in the current rate environment. The company’s aggressive leaning on floating-rate loans is expected to drive net investment income growth, providing a cushion against potential economic downturns.

Dividend Payout and Coverage

Stellus Capital Investment has consistently covered its dividends with net investment income. The current dividend stands at $0.1333 per share per month, translating to an annualized yield of 12%. In the first quarter of 2024, the dividend payout ratio was 91%, and 82% over the last twelve months.

The company’s ability to cover its dividend is indicative of its strong financial health and strategic positioning.

Looking ahead, there is potential for the company to improve its dividend payout ratio. If the central bank maintains its current stance on interest rates, Stellus Capital Investment could see further net investment income growth, enhancing the margin of safety for passive income investors and potentially lowering the dividend payout ratio.


Stellus Capital Investment’s stock is currently trading at a moderate premium to net asset value (NAV), approximately 3%. This valuation is considered sensible given the company’s strong fundamentals and potential for growth. For comparison, other BDCs such as Ares Capital Corp. (ARCC), Golub Capital BDC Inc. (GBDC), and Blue Owl Capital Corp. (OBDC) also trade at small premiums to NAV, up to 10%.

Stellus Capital Investment’s moderate valuation, combined with its solid dividend coverage and growth prospects, suggests that the stock is attractively priced.

Future Prospects and Risks

Stellus Capital Investment is poised to benefit from a higher-for-longer interest rate environment, given its high percentage of floating-rate loans. The company’s strategic investments and robust portfolio management are expected to drive net investment income growth, supporting its attractive dividend yield.

However, there are inherent risks associated with high-yielding BDCs. While Stellus Capital Investment’s dividend is well-covered, the high yield reflects underlying risks that investors should consider. These risks include potential economic downturns, changes in interest rate policies, and fluctuations in market conditions.

Attractive Investment for Passive Income

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Stellus Capital Investment Corporation presents a compelling opportunity for passive income investors. The company’s ability to cover its dividends with net investment income, combined with its strategic positioning in a higher-for-longer interest rate environment, supports its attractive yield.

The recent pullback in the stock price offers a potential buying opportunity, as Stellus Capital Investment continues to demonstrate strong financial performance and growth prospects.


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