This Undervalued Stock Trades At Near Book Value And Pays 11% Yield

| About: Prospect Capital (PSEC)

Some analysts and investors believe a bubble in dividend stocks is building. Since the Federal Reserve has set interest rates at record low levels, it is nearly impossible to generate meaningful income through a savings account or certificate of deposit. For many investors, the best option to create some income and have almost "bond-like" stability has been to buy large-cap stocks like AT&T Inc. (NYSE:T) or McDonald's Corporation (NYSE:MCD). Ten-year U.S. Treasury bonds are paying about 1.5%, so companies like AT&T, which pays a yield of about 4.7%, or McDonald's, which pays about 3.2%, are attractive options, especially since both companies have stable business models that are relatively recession-resistant. That said, a recent Barron's article states there is no dividend bubble, and that McDonald's and AT&T might continue to draw investor interest.

While the dividend bubble argument seems premature for now, it is true that many dividend stocks have been pushed up towards 52-week highs, and this has brought yields down to less attractive levels. Going forward, investors might be well-rewarded by putting well-known large caps aside and focusing on the lesser-known names that often offer a much higher dividend. With that in mind, here is one stock that pays investors over 10%, and it could even be considered as a value stock ,since it trades for just around book value, and at about 7 times earnings:

Prospect Capital Corporation (NASDAQ:PSEC) makes investments in a wide range of companies, including those that are in the healthcare, energy, financial services, manufacturing and other industries. Prospect looks for special opportunities that include providing capital for leveraged buyouts, acquisitions, and growth plans. It offers capital in the form of debt or equity and uses profits and interest income to pay shareholders a very generous yield of about 11%. That is is about double or even triple the yield offered by many popular dividend stocks. Prospect has invested (through debt or equity) in a number of well known companies that include Arctic Glacier Holdings, Inc. (a maker of ice), Pre-paid Legal Services, Inc., Totes Isotoner Corporation, Targus Group International, Inc., among others. A list of companies in the Prospect portfolio can be seen here.

Like many dividend stocks, Prospect's shares have been trending higher; however, the stock still looks undervalued and it trades very close to book value, which is $10.82 per share. This stock offers value, based on that plus a price to earnings ratio of just about 7, and a yield that will beat most investments. Patient investors should consider a buying-on-dips strategy that has been paying off for the past several months in this and other dividend stocks.

Here are some key points for PSEC:

  • Current share price: $11.20
  • The 52 week range is $7.58 to $12
  • Earnings estimates for 2012: $1.50 per share
  • Earnings estimates for 2013: $1.17 per share
  • Annual dividend: $1.22 per share which yields 11%

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.