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

Capital Southwest: 11% Yield, 19% Dividend Growth, Higher Rates = Strong Growth

Dec. 03, 2022 9:15 AM ETCapital Southwest (CSWC)60 Comments


  • Capital Southwest grew NII by 48% and total Investment Income by 32% in the quarter ending 9/30/22.
  • Capital Southwest's regular quarterly dividend yield is 11.46%. Plus the supplemental dividend adds another 1.1%. Total yield = 12.56%.
  • Capital Southwest's 5-year dividend growth is 19.53%, one of the highest in the BDC industry.
  • Looking for more investing ideas like this one? Get them exclusively at Hidden Dividend Stocks Plus. Learn More »

BDC concept is shown by businessman.


Wouldn't it be useful to be on the right side of the rising rates equation?

Well, that's what is happening for certain Business Development Companies, or BDCs. These companies lend money to privately held companies - their loans are often predominantly at floating

Our Marketplace service, Hidden Dividend Stocks Plus, focuses on diverse, undercovered, undervalued income vehicles, and special high yield situations.

There's currently a 20% discount, and a 2-Week Free Trial on offer.

We publish exclusive articles each week with investing ideas for the HDS+ site that you won't see anywhere else.

We offer a range of income vehicles, many of which are selling below their buyout and redemption values. Find out how our portfolio continues to beat the market by a wide margin in 2022.

This article was written by

Double Dividend Stocks profile picture

Robert Hauver, MBA, aka “Double Dividend Stocks” was VP of Finance for an industry-leading corporation for 18 years and has been investing for more than 30 years. He focuses on undercovered and undervalued income vehicles and he leads the investing group Hidden Dividend Stocks Plus.

With Hidden Dividend Stocks Plus he scours the world's markets to find solid income opportunities with dividend yields ranging from 5% to 10% or more, backed by strong earnings. Features include: a portfolio with up to 40 holdings at a time including links to associated articles, a dividend calendar, weekly research articles, exclusive ideas, and trade alerts. Learn More.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CSWC either through stock ownership, options, or other derivatives. 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.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle 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

Comments (60)

Do you have any thoughts about the potential impact of Blackstone’s announcement that its private market BDC reached the 5% withdrawal limit, perhaps on BXSL or BDCs in general?
pardon me if this is a noob question, not that familiar with BDC's, but in looking at the Cash Flow it looks like they've had negative cash flow for each of the last 5 years, with 2022 being the worst. Is this not something to be concerned about with a BDC ?
pgallop profile picture
@Naked Stranger Sounds like a very good question... hope you get answers.
@Naked Stranger

I see no one wants to reply to your question.

I assume you are looking at "Consolidated Statements of Cash Flows" to come to that conclusion?

Looking at that doesn't tell the whole story.

Any BDC that is growing, and that covers most of them, will have more "Purchases and Originations of investments" than "Proceeds from Sales & Repayments of investments." That is how their portfolios grow.

That growth is fueled by a combination of issuing new equity and then leveraging that new equity.

So in looking at CSWC's last 10-Q they had $216.8mm in new purchases and only $84.8mm in sales & repayments. That number alone accounts for the negative cash flows from investing activities.

But that $216.8mm in new investments is not just money spent. They are new assets on the balance sheet that produce income.

The BDC only pays, on a quarterly basis, a fraction of that $216.8mm of new purchases & originations because it is financed either by the issuance of a new equity (which costs them the dividend payout on those new shares), or about 5% annually of the amount financed by leverage.

The best measurement of a BDC's cash flow is to go to the "Consolidated Statements of Operations."

There you will find all their sources of investment income, and all their expenses. Subtracting all expenses from total investment income will get you the BDC's net investment income (NII). This is a more accurate picture of their cash flows.

Below the NII line is net realized gains or losses, and that is because net realized gains/losses are treated different than NII for tax purposes. Realized gains/losses are not used in the calculation to determine NII. Net realized gains are a taxable event (unless the BDC distributes them)

Bottom line is look at total investment income, minus total expenses to look at the cash flow of the BDC.

If you want to dig a little deeper into actual cash flows, you can check and see how much PIK income is reflected in total investment income. Many, but not all BDC's break this number out. PIK income is income that must be reflected in investment income in the quarter it is "earned," even though the BDC won't actually get that income until the loan matures. This is a nuance of the tax structure BDC's are bound by.

Most BDC's have a modest amount of PIK income in their total investment income, and some have a pretty sizable amount. In general, less is better because there is always the possibility the company will default on their loan and the PIK will never be paid., although most is paid.

PIK income can be used a a kicker to increase the total return of a loan, or a means for which the lender gives the company some breathing room on their cash flow struggles in return for a greater return when the loan is paid off.

Hope this helps.
@Bekster Thanks for this. Very Helpful!
I have a full position in CSWC, but it has bounced back the least of all of the BDCs I own, despite one glowing article on SA after another proclaiming its merits. Curious.
Income4ever aka Cyclenut profile picture
@Tennis bum
Premium to nav has a bit to do with it.
@Tennis bum CSWC had risen to about 19.40 (I sold some there) then they offered a secondary and the price has never recovered. TRIN and TPVG has had secondaries this year which in addition to other problems have significantly negatively impacted price. ARCC also had a secondary which it quickly recovered from shortly after the secondary. Just my observation, BTW, I rebought the CSWC shares at the 18.00 area, and here we sit twiddling our thumbs. As I have a habit of selling my higher shares, I was not lucky enough to sell some TRIN and TPVG. Hence, those two are sitting deeply in the red while my other BDCs are sitting in the green. So, I am not a fan of secondaries as many others are.
Income4ever aka Cyclenut profile picture
Correct about ARCC recovering faster after secondary but since it's been floundering as well...
Hold tight collect dividends

Long Arcc, Cswc and recenty Trin
arson profile picture
Full position. Staying Long but watching premium.
Richard Hill profile picture
Most BDC do well in rising rate environment as they hold variable rate loans and hopefully also have fixed rate debt. Not sure what happens once rates fall back to lower levels, but right now the future looks bright.
Not related to CSWC: Every BDC I read about apparently has majority 1st liens. I wonder who has the 2nd lien or 3rd lien. Regional banks? Long ARCC and CSWC
Steve Rasher profile picture
@Jildisjild There may be no second or third lien. Also, some of the lesser quality BDCs may end up taking a second or third lien at higher rates to compensate for the higher risk. Steve
elliot_mllr profile picture
I have owned CSWC in tax deferred accounts for a few years and now I have purchased CSWC in my currently taxable accounts.
Elliot Miller
@elliot_mllr In a taxable account, aren’t all CSWC distributions treated as ordinary income? I have a small position in taxable but reluctant to add more for this reason. Thanks.
elliot_mllr profile picture
@rgsaville :
I understand your perspective, which is why my tax deferred position in CSWC exceeds my taxable account holding. However, given the fact that most of my income is tax deferred (large positions in midstream energy infrastructure partnerships and corporations) I can tolerate some taxable income.
Elliot Miller
It's a good price compared to start of the year down almost 40%.
Good place to start or add additional shares.
Waiting to see what the Fed does 50 sounds like maybe 75 basis points now with the jobs report.
birder profile picture
I have a moderate position in CSWC. It is a very attractive buy current/y with that 11% dividend.
subaruguy profile picture
@birder Long 300 shares how bout you?
birder profile picture
@subaruguy 1800 shares. I do like this stock a lot.
subaruguy profile picture
@birder And recently raised their dividend!
subaruguy profile picture
Long CSWC and its 12% dividend!
Double Dividend Stocks profile picture
Longtime Subaru owner - remember the SVX sportscar?
subaruguy profile picture
@Double Dividend Stocks Hey my friend, recently purchased the 2023 Subaru
Crosstrek Sport with a 2.5L engine!
birder profile picture
@subaruguy My oldest son will not purchase anything else but Subaru. I used to purchase only Fords but they stopped making the cars I liked so now I am driving a Toyota Rav4. It is not an ideal car but I don't think there are any any longer. I did like my Fords as long as they made them but then they stopped.
Income4ever aka Cyclenut profile picture
Off topic

Does anyone know of a website where you can compare say, ETFs and see holdings that overlap?
birder profile picture
@Income4ever aka Cyclenut Morningstar does that but it costs an annual fee. Fidelity also has a decent tool but I think you might have to have an account there. Seeking Alpha has one also--seekingalpha.com/...

Here is another. JUSTetf.com
Income4ever aka Cyclenut profile picture
I found a good site

CSWC looks good here but not nearly as much a screaming bargain as TRIN.
@AllStreets Hi, do you have any concerns about the large price drop of TRIN and the safety of its dividend?
Income4ever aka Cyclenut profile picture
Very true... Trin is a seal at this level
Double Dividend Stocks profile picture
TRIN: Shorter track record, but 9/30/22 NAV $13.74. More to come on TRIN.
Thanks for reading and commenting.
OlePhart profile picture
CSWC - You definitely have my attention. Payouts look very good. This appears to be a very shareholder friendly BDC.
Double Dividend Stocks profile picture
Yes it does look shareholder friendly and well run.
Thanks for reading and commenting.
Income4ever aka Cyclenut profile picture
The main reason for CSWC decline is year was related to it premium rather than anything else... it rose to $26.74 early in February and was hit hard from that point.

It's one of the oldest since 1960s and best in this space. Smart enough to spearhead a JV with MAIN ....
Long Cswc looking to add -$17.75
The Dividend Collectuh profile picture
@Income4ever aka Cyclenut I need and hope they got to at least $30 one day
Double Dividend Stocks profile picture
@Income4ever aka Cyclenut
Yes - CSWC's premium was up to 1.60+, so current ~10% P/NAV is comparatively cheaper. Moreover, it's undervalued on a P/NII basis.
Thanks for reading and commenting.
@Income4ever aka Cyclenut Just curious about what BDCs you may hold or recommend. I bought OCSL as a core position in this space at a pretty good discount to NAV in September, which has since rebounded. Thinking about ORCC that is available at a discount now, but have not pulled the trigger yet. Thanks for your consideration. You seems to be on top of these kinds of opportunities and investments.
I have a large position. It’s one of the best out there with the current price right now.
Nice write up. CSWC is already at a full position for me but may have to add a little more on a dip.
Double Dividend Stocks profile picture
@Saint Mark
Avg'g down could work well.
petergo007 profile picture
thank you for your article, m8!

on the same page as you knackers

discl: long
Double Dividend Stocks profile picture
Thanks for reading and commenting.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About CSWC

SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on CSWC

Related Stocks

SymbolLast Price% Chg
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.