Dividend stocks have been in an uptrend for the past couple of years. Record low interest rates have created huge demand for yield and one of the best strategies has been to buy dividend stocks on dips. This has been working for many investors and may continue to make sense as rates are expected to stay low for at least a couple more years. One recent pullback that is worth considering now is in Prospect Capital Corp. (NASDAQ:PSEC). This high-yielding stock has been participating in the dividend rally and it recently hit new 52-week highs. However, it recently announced a stock offering which knocked the shares back down to an attractive entry point which is near a key support level. Here is a closer look at the company and why the current share price appears to be a solid buying opportunity:
Prospect Capital invests in small to midsized companies in a range of industries which includes energy, manufacturing, healthcare, financial services, etc. It has made debt and equity investments in companies like Totes Isotoner Corporation, Arctic Glacier Holdings, Inc., Targus Group International, Inc. and many more. By investing in a variety of industries and businesses, this company has created a diversified portfolio which reduces risks for investors.
As a business development company, or "BDC," Prospect Capital is set up to provide shareholders with a very generous dividend. BDC's typically pay a very high percentage of earnings out to shareholders. Also, by using leverage this company amplifies returns. It borrows money at low rates and invests that capital at higher rates. Another huge plus is that this company pays a dividend on a monthly basis which creates a very frequent income stream when compared to most stocks which pay on a quarterly basis.
The pullback in this stock occurred after the company announced it would sell shares in a secondary offering. The company priced about 35 million shares at $11.92. When other high-yielding BDC's or mortgage REIT stocks have announced a secondary offering, many dropped and rebounded in the coming days and weeks as the new shares were absorbed by investors seeking high yields. This same rebound could happen with shares of Prospect Capital and now looks to be a good time to buy since it is trading near a key support level. This stock has a 200-day moving average of about $10.70, and with the stock near that level now, the downside risk appears limited. Another supporting factor is that the stock is trading right around book value, which is $10.83 per share. This stock offers a high yield, monthly dividends and with the shares back down to key support levels, it makes sense for income investors to consider buying the stock.
Here are some key points for PSEC:
Current share price: $10.89
The 52 week range is $8.86 to $12.25
Earnings estimates for 2012: $1.46 per share
Earnings estimates for 2013: $1.23 per share
Annual dividend: $1.22 per share which yields 11.2%
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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.