Entering text into the input field will update the search result below

Preferred Stock For OXLC And Other CLO Equity Funds: Cheap Dividends


  • Are preferred stock for CLO equity funds expensive leverage, or cheap dividends?
  • Looking at OXLC's newly issued preferreds, the OXLCP's.
  • The use of leverage, and in particular preferred stock, is a positive from the standpoint of the common shareholder.
  • Looking for more stock ideas like this one? Get them exclusively at CEF/ETF Income Laboratory. Get started today »

Author's note: This article was released to CEF/ETF Income Laboratory members on February 15, 2020. This article was co-produced with Alpha Male.

Preferred Stock: Expensive Leverage Or Cheap Dividends?

The main thesis of this article is to explain why issuing preferred shares as leverage benefits CLO equity closed-end funds.

Oxford Lane Capital Corp (NASDAQ:OXLC) made news when they announced they had priced a new preferred stock offering, raising ~$87.5mm by issuing preferred shares with a coupon of 6.25% (to commence trading within 30 days of 2/11/20 under the ticker: NASDAQ:OXLCP). Some people wonder why they’d do this as that seems to be expensive debt at a time when debt is relatively cheap. I’m here to say this was a good move by OXLC and should be viewed positively for OXLC management and OXLC common shareholders alike. As the title alludes, within the closed-end fund space some people wonder whether preferred stock issuances should be viewed as expensive leverage or a cheap distribution. My answer is ‘why can’t it be both!?’

For a fund like OXLC, whose distribution rate is much higher than 6.25% (currently ~17% to be exact), this move creates wealth for the common shareholders. Using the figures given to us by OXLC we know the fund earns ~16% on their CLO Equity positions, on average. With that in mind the fund is earning roughly 10-11% of “excess income” on that $87.5mm. That equates to ~$8-9mm annually that can flow to the common shareholders via the distributions. It’s this leverage that allows OXLC to pay such a handsome distribution rate to the common shareholders in the first place.

I view this issuance side-by-side with other financing alternatives and this one is the clear winner – let’s look the options:

  • First, OXLC already uses reverse repurchase contracts (or “repo’s”) to obtain financing on some

Profitable CEF and ETF income and arbitrage ideas

https://static.seekingalpha.com/uploads/2019/5/2/27546953-15567808556447084.png At the CEF/ETF Income Laboratory, we manage market-beating closed-end fund (CEF) and exchange-traded fund (ETF) portfolios targeting safe and reliable ~8% yields to make income investing easy for you. Check out what our members have to say about our service.

To see all that our exclusive membership has to offer, sign up for a free trial by clicking on the button below!

This article was written by

Stanford Chemist profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

CEF/ETF Income Laboratory is a premium newsletter on Seeking Alpha that is focused on researching profitable income and arbitrage ideas with closed-end funds (CEFs) and exchange-traded funds (ETFs). We manage model safe and reliable 8%-yielding fund portfolios that have beaten the market in order to make income investing easy for you. Check us out to see why one subscriber calls us a "one-stop shop for CEF research.”

Click here to learn more about how we can help your income investing!

The CEF/ETF Income Laboratory is a top-ranked newsletter service that boasts a community of over 1000 serious income investors dedicated to sharing the best CEF and ETF ideas and strategies.

Our team includes:

1) Stanford Chemist: I am a scientific researcher by training who has taken up a passionate interest in investing. I provide fresh, agenda-free insight and analysis that you won't find on Wall Street! My ultimate goal is to provide analysis, research and evidence-based ways of generating profitable investing outcomes with CEFs and ETFs. My guiding philosophy is to help teach members not "what to think", but "how to think".

2) Nick Ackerman: Nick is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. Since then he has continued with his passion for investing through writing for Seeking Alpha, providing his knowledge, opinions, and insights of the investing world. His specific focus is on closed-end funds as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long term financial goals.

3) Juan de la Hoz: Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He is the "ETF Expert" of the CEF/ETF Income Laboratory, and enjoys researching strategies for income investors to increase their returns while lowering risk.

4) Dividend Seeker: Dividend Seeker began investing, as well as his career in Financial Services, in 2008, at the height of the market crash. This experience gave him a lot of perspective in a short period of time, and has helped shape his investment strategy today. He follows the markets passionately, investing mostly in sector ETFs, fixed-income CEFs, gold, and municipal bonds. He has worked in the Insurance industry in Funds Management, helping to direct conservative investments for claims reserves. After a few years, he moved in to the Banking industry, where he worked as a junior equity and currency analyst. Most recently, he took on an Audit role, supervising BSA/AML Compliance teams for one of the largest banks in the world. He has both a Bachelors and MBA in Finance. He is the "Macro Expert" of the CEF/ETF Income Laboratory.

Analyst’s Disclosure: I am/we are long THE STOCKS IN THE PREMIUM PORTFOLIOS. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.