Going for the Gain
After reviewing yesterday’s list of dividend increases, Gladstone Investment Corp. caught my eye for a couple of reasons.
Number one of course is the above average payout which is hovering right around an 8% annual yield.
The second thing and perhaps even more important to the DDI portfolio is the fact that this is a MONTHLY dividend payer. That’s important to the DDI portfolio because it means cash will be flowing in on a more regular and constant basis which in turn allows the portfolio to re-invest funds all that much sooner.
But, can it all be that easy?…
Deploying the cash
The cash balance of the DDI portfolio had reached almost $1100 and since I hadn’t made any purchases since my Pfizer acquisition in early June, it was time to deploy some of that built up cash. Since my last purchase was more conservative buy with a (yawn.) 3% yield, I was looking to move into something with a bit more juice .
Of course it’s easy to get drawn in to buying any investment with an 8% yield – especially in today’s banking market where a savings account pays less than 1% per year on average! There have to be some risks with an investment such as Gladstone – and there are.
As a BDC or business development company, Gladstone looks to invest money in other smaller companies just starting out or trying to grow their business. In return for risking it’s share holder’s capital in these somewhat riskier businesses, Gladstone hopes to reap bigger rewards when these companies go public or are sold or acquired through a M&A (mergers and acquisition) deal with a larger company.
Things can and do go wrong with investments in smaller companies, and if enough of the investments go bad even the BDC’s liquidity and share price can be affected.
Allied Capital goes bad
Take for example Allied Capital who was list listed on the NYSE with ticker: ALD. Allied was started back in 1958 and went public in 2001. Many investors sought out Allied based on it’s high and fairly consistent dividend payments. However, in 2008 during the credit crisis one of Allied’s largest holdings filed for bankruptcy and Allied shares lost 50% of their value. The shareholders in Allied were lucky not to lose their entire investment as Ares Capital, another BDC, offered to buy Allied and convert Allied shares to Ares shares which today are yielding right around 9%.
I added 50 shares of Gladstone (ticker: GAIN) at a purchase price of $7.36/share for a total investment of $368.00. The yearly payout will be $29.44 or $7.36/month. Because the portfolio is now close to generating $500/month in income, an investment of this size and risk can easily be made up should there be a complete loss on this investment. I look forward to seeing how Gladstone performs over the next 12 months as the portfolio continues to grow.