A 7% Yield And Monthly Dividends For Your Retirement Portfolio

| About: Gladstone Capital (GLAD)
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In the normal course of my screens for income securities, I ran across and interesting preferred stock that isn't like other traditional issues. In this article, we'll take a look at the Gladstone Capital (NASDAQ:GLAD) Series 2016 Term Preferred Stock (GLADP, may differ depending on your broker) to see what makes it unique and whether or not it could be a nice addition to your income portfolio.

First off, this issue has several characteristics that are similar to traditional preferred stock offerings. GLADP was issued at $25 per share and pays regular monthly dividends to its holders, which is more desirable than the typical quarterly distributions. In addition, it has no debt issue backing it so it is a true preferred stock. Where GLADP sets itself apart, however, and why I think it could be a nice choice for those investors that normally choose bonds over preferreds, is that it has a stated maturity date. GLADP is required to be redeemed on December 31, 2016, meaning it has just under three years remaining. This creates a unique situation in the preferred stock world that can cater to not only preferred investors, but those investors who typically choose bonds. GLADP is essentially a high-yield, short term bond equivalent at this point given its maturity date.

GLAD also has the ability to call GLADP early if it chooses. GLADP has provisions that state it can be called beginning at year end 2012 for a 1% premium, at year end 2013 for a 0.5% premium, and year end 2014 for no premium. Essentially, GLAD can call GLADP right now for a 12.5 cent per share premium or it can wait until the end of this year to call it for no premium. Of course, with it maturing in less than three years anyway, I think that possibility is remote. It is something to keep in mind, however.

The best part about GLADP is its robust distributions. As I mentioned earlier, GLADP pays monthly distributions, offering superior current income to its holders versus a traditional quarterly payout. Those payouts are also robust at an annualized rate of $1.78125 per share, offering a coupon yield of 7.125%. That is a very attractive yield made more attractive by the fact that you get paid so regularly and that the issue has very little maturity risk, unlike some traditional preferreds. In addition, distributions are cumulative, meaning that barring some kind of bankruptcy event, your dividends are virtually guaranteed as GLAD cannot simply miss payments; it must make up any distributions it fails to make.

GLADP is trading for a small premium to its issue price right now, 55 cents as of this writing, so if you purchase today and hold to maturity you will experience a capital loss of 55 cents. While this is unattractive and does reduce the yield-to-maturity, it is a relatively small premium considering the monthly, high yield payouts.

Unfortunately, GLADP's distributions are not eligible for the preferential dividend tax treatment that some other preferreds enjoy. Thus, for those holding GLADP in a taxable account, the after-tax yield could be materially lower based on the individual's tax situation. Of course, if you hold GLADP in a retirement account, it doesn't matter but it is something to keep in mind if you are considering GLADP for your taxable account.

Overall, GLADP offers investors an interesting play in the preferred space as it offers monthly, high yield payouts but also doesn't have the maturity risk that perpetual preferreds possess. This makes it a very attractive place to park excess cash for less than three years as you know it will be redeemed at the end of 2016 for the $25 issue price. If you are okay with the small premium shares trade for right now, you can enjoy great dividends for a couple of years and then get your capital back to reinvest in something else when the time comes.

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. I may initiate a position in GLADP at any time.