Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Summary

  • Oxford Lane Capital's preferred stock offers monthly distributions for current income.
  • Current yield of 8% is very strong in relation to other preferreds.
  • Trading at a discount, this preferred offers a chance for capital gains as well.

Oxford Lane Capital (NASDAQ:OXLC) is an exchange-traded closed end investment fund that focuses on senior secured loans to companies whose debt is unrated or below investment grade. In doing so, it hopes to achieve current income and maximize total return on its shares. While this business model is not new or unique, it does offer an interesting way for investors to get exposure to this type of debt. However, in this article, we aren't going to be looking at the common stock. Rather, we'll be taking a look at a preferred issue from OXLC that can produce current income for your portfolio via monthly dividends and a high yield.

The issue in question is OXLC's Cumulative Series 2023 Term Preferred Shares (OXLCO) and we'll take a look at its characteristics to better understand what it is. OXLCO is a traditional preferred stock in that it has no debt issue backing it but in terms of similarities to other preferred stock issues, there isn't much else to speak of. However, the differences from other traditional preferreds OXLCO has are improvements in my view, and make the issue more attractive than it otherwise would be.

To start, instead of paying quarterly dividends, OXLCO pays you every single month. Not only is this desirable for the obvious reason that you don't have to wait to get your money, but it also allows faster compounding. You can use the money each month to buy more shares, invest it elsewhere or spend it if OXLCO is part of a portfolio you use to generate income in retirement. This is infinitely more desirable than quarterly dividends and I believe this is a big plus when looking at OXLCO.

In addition, OXLCO actually has a stated maturity date. Most traditional preferreds are perpetual, meaning that unless the issuer calls them, they will persist as long as the entity exists. With OXLCO, you have a stated maturity date of June 2023, meaning this preferred has a lifespan of just over nine years left. This is interesting as it removes the uncertainty of being perpetual that you get with traditional preferreds and allows investors to price this like a bond. Since we know what the coupon is and we know when it matures, we can treat OXLCO like an exchange-traded debt issue rather than a traditional preferred, removing some maturity risk out of the equation.

Unfortunately, OXLCO isn't eligible for the preferential tax treatment dividends normally receive. Many traditional preferred stocks are eligible for the favorable tax treatment, offering a boost to after-tax yield over issues that aren't eligible, but OXLCO doesn't offer this. If you're holding OXLCO in a retirement account it doesn't matter but for those using it to fund living expenses, for instance, this is something to consider with your particular tax situation.

Now, we'll take a look at OXLCO's dividend and yield situation. OXLCO was issued at $25 per share and pays $1.875 in annualized dividends, or 15.625 cents monthly. This results in a coupon yield on this issue of 7.5%, which is very strong, particularly considering that it pays you monthly instead of quarterly. However, it gets better. OXLCO is currently trading for a $1.50 discount to par, meaning its current yield at $23.50 is actually right at 8%. There aren't many places one can get monthly payouts and an 8% yield, which is why I think OXLCO is so attractive.

One final note on OXLCO is that it is callable by OXLC on or after June of 2016. This means that should OXLC decide to call it, holders of OXLCO are entitled to receive $25 per share, regardless of where the issue is trading at the time of redemption. This opens the door for potential capital gains as if OXLCO is called at $25 and you purchase for today's price of $23.50, you will receive $1.50 in capital gains, or nearly an additional year's worth of dividends. I'm not going to try and predict whether or not OXLCO will be called in 2016 but it is something you must be aware of when investing in this security. Regardless, it will be redeemed no later than 2023, as discussed earlier.

OXLCO offers an interesting combination of characteristics for income investors. The biggest differentiators for me are that OXLCO has a stated maturity date, making it essentially a medium term bond equivalent, and that it pays monthly distributions, something you don't get with most preferreds or debt issues. Thus, OXLCO represents a unique opportunity for investors to gain current income at a high yield while purchasing at a discount to par. As long as you understand the tax implications of the distributions of OXLCO and you are comfortable being a creditor to OXLC, this issue may represent a great income opportunity.

Source: Monthly Dividends And 8% Yield? Yes, Please

Additional disclosure: I may initiate a position in OXLCO at any time.