GAIN Preferred: A Monthly Pay Preferred Trading Near Call With A 7% Yield?

| About: Gladstone Investment (GAIN)

For some reason I have always preferred monthly pay securities for the income portion of my portfolio. I use income securities as a base for my trading account. They seem to be less volatile (at least the ones on which I focus) and I keep GTC orders on several at a time in order to catch price displacements as they may occur.

One of these monthly payers is Gladstone 7.125% Series A Cumulative Preferred (GAINP). Gladstone Investment Corporation (NASDAQ:GAIN) is a business development company (here). A BDC makes investments in and loans to smaller, developing companies in the hopes that these investments will increase in value and continue to make high-interest payments on loans. There are many such companies and some focus on equity while others focus on debt (here). They are treated much like REITs in that they must pay out 90% of their income to shareholders.

Gladstone has certainly had its issues with performance as laid out well in a recent Seeking Alpha Article (here) although a more positive spin was also set forth recently (here).

The common stock pays out a dividend of $0.07 per share monthly. Net investment income for the quarters ending September 30, 2012 and 2011 was $4.5 million, or $0.22 per share, and $4.8 million, or $0.23 per share, respectively, showing a decrease in net investment income. Value of the company's investment portfolio decreased by 9.6% from 2011 to 2012 and net asset value decreased 11.6% year over year. These trends are troublesome for the future and suggest caution going forward to ensure that dividend obligations can be met. That being said, $0.84 per share of common dividends would have to be suspended before any cut in the preferred could be contemplated.

Personally I prefer to be higher in the capital structure if at all possible. The Gladstone Preferred provides just that. With a current yield of about 7.1%, paid monthly, and the benefit of a cumulative preferred structure, this preferred fits my goals for an income investment. The shares can be called in early 2016 and mature one year later. At current prices, yield to maturity is still 6.9%, limiting downside risk.

If you believe that this BDC can continue to support some level of common dividend, the preferred is certainly safe and provides well above-average yield for income hungry investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.