It was not a good day for the stock market or for Boston on April 15. Some explosions at the Boston Marathon occurred in an apparent terrorist attack. Unfortunately, this is the world we live in and as we have experienced and dealt with terrorism in the past, it seems likely that we will continue to do so in the future. One thing is for sure, and that is that panic selling in the face of a market correction or terrorism or both, just does not make sense based on historical data. Even though many investors may know this is not the time to get emotional and hit the sell button, it happens all the time. All we can do is take advantage of these buying opportunities that short-term and even panic selling gives us.
A bad day or week in the market, or a terrorist attack is not going to change the fact that many investors are looking desperately for income, and dividend stocks continue to be a top choice. While cash balances in savings accounts continue to earn next to nothing, a number of stocks offer dividends that can generate substantial income in a portfolio. Even better is to take advantage of a steep one-day selloff in the market to buy these high-yielding stocks. If you buy on a pullback, you have a chance to not only earn high yields, but also capital gains in a rebound that these stocks could soon see:
Fifth Street Finance Corp. (NYSE:FSC) is set up as a business development company, specializing in making loans and investments in smaller and medium-sized enterprises. By borrowing money at low interest rates and loaning it out to other companies at much higher rates, Fifth Street Finance is able to pay shareholders a high yield. This company pays a 9.6 cent per share dividend on a monthly basis which creates a frequent stream of income for investors when compared to most stocks that pay dividends on a quarterly basis.
Fifth Street Finance shares were trading at about $11 per share just days ago. However, as many business development companies do, this company announced and completed (closed) a secondary offering at $10.85 per share. Thanks to a big one-day decline in the stock market, these shares have dropped to about $10.40, which is a significant discount to the $10.85 price at which the company just sold shares. Investors who get in now might be able to see the shares rebound quickly since selloffs caused by secondary offerings often fade rapidly for high-yielding stocks in this sector. The current share price is also way below the $11.50 price target set by analysts at UBS (NYSE:UBS).
A major downside risk for dividend stocks is whether or not the dividend is safe and sustainable. The good news is that analysts at JPMorgan (NYSE:JPM) recently weighed in on this and views the dividend at Fifth Street Finance as "attractive" and "secure." Downside risks are reduced since Fifth Street Finance invests in a wide range of industries which provides diversification. With the economy showing signs of general improvement in housing and other sectors, the outlook becomes increasingly positive for companies like Fifth Street Finance and that is yet another reason to take advantage of the excessive pullback in this monthly dividend-payer with a yield of around 11%.
Prospect Capital (NASDAQ:PSEC) is another company in the business development sector which makes loans and investments in other businesses. This stock is very attractive for income investors because it pays a high-yielding dividend to its shareholders on a monthly basis. Not long ago these shares were trading for over $11, but a recent selloff has pushed the stock down to $10.65. That appears to be a solid buying opportunity as this stock will pay investors every month while waiting for the share price to rebound.
Prospect Capital makes debt and equity investments in a wide range of industries which including healthcare, financial services, energy, manufacturing, and others. This provides diversification into many sectors of the economy which reduces risks for shareholders. If the economy were to go into recession that would create downside risks for this stock, however, it appears that slow but steady improvements in the U.S. economy are more likely.
This stock looks undervalued because it is now trading below recent highs and even below book value, which is $10.81 per share. It also has a very generous dividend yield of just over 11% which is paid at a rate of 11 cents per month. Earlier this year, analysts at Barclays (NYSE:BCS) placed an "overweight" rating on the stock and set a $12 price target. That gives investors plenty of upside potential, especially while receiving a high-yielding dividend every month.
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long FSC. 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.