This 11% Yielder Was Recently Upgraded To A Buy

| About: KCAP Financial (KCAP)

Getting your money to work for you is a real challenge these days. The Federal Reserve has lowered rates and has plans to keep them low for the next couple of years, if not longer. Since certificates of deposits and other traditional savings accounts offer very little yield, investors have turned to dividend stocks for the past couple of years. Popular dividend-paying stocks have performed well recently; however, that has pushed the yields down significantly.

For example, oil sector giant Exxon Mobil Corporation (NYSE:XOM) now yields just 2.6%, Johnson & Johnson (NYSE:JNJ) yields 3.6%, and The Coca-Cola Company (NYSE:KO) yields just 2.7%. Stocks like AT&T (NYSE:T) offer 4.8%, but the shares are trading for about 16 times earnings, which is above the market average of around 13 times. Furthermore, these stocks trade at or near 52-week highs, which means the upside could be limited in the future. If you are going to take the risks of owning stocks, it might make sense to consider lesser-known companies that can provide a much higher yield.

Here is a closer look at one company that offers a yield that is double the size of what AT&T offers, and more than triples what some well-known blue chip stocks offer:

KCAP Financial, Inc. (NASDAQ:KCAP) is set up as a business development company that is focused on making investments into a wide variety of companies. It provides loans and makes equity investments with the goal of generating current income and capital appreciation. It also invests in high-yield bonds, and distressed debt securities. KCAP often targets companies with earnings of $7 to $50 million, which have a history of generating consistent cash flow, strong management teams, solid market positions in industries with strong fundamentals. Here are 4 reasons to consider the stock now:

1) KCAP focuses on companies in the following sectors: healthcare, manufacturing, real estate, transport, finance, electronics, packaging, automotive, insurance, utilities, and others. This allows KCAP to have a portfolio of investments in a broad range of industries and this reduces risks.

2) KCAP recently reported solid financial results. For the second quarter of 2012, KCAP announced total investment income of about $9.5 million, which compares favorably with approximately $6.1 million in net income for the three months ended June 30, 2011. The company also saw growth in its debt securities portfolio which is valued at $143.3 million at June 30, 2012. That is up from $114.7 million at December 31, 2011.

3) In the second quarter of 2012, KCAP Financial increased its dividend by 33%. The quarterly dividend is now 24 cents per share which is up from 18 cents per share. Rising dividends can often lead to increased investor interest and a higher share price.

4) On August 17, 2012, analysts at Stifel Nicolaus upgraded the shares of KCAP Financial from hold to buy. Analyst upgrades can draw more investors to a stock and push the price higher.

KCAP shares have been trending higher, so it probably makes sense to wait for a pullback. In the long run, this stock could be poised to continue providing above-average returns.

Here are some key points for KCAP:

  • Current share price: $8.55
  • The 52 week range is $5.50 to $8.79
  • Earnings estimates for 2012: 84 cents per share
  • Earnings estimates for 2013: 99 cents per share
  • Annual dividend: 96 cents per share, which yields about 11.2%

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. 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: 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.

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