KCAP Financial: Strong Buy Rating, A Yield Of 11% Makes This Stock Ideal For Income Investors

| About: KCAP Financial (KCAP)
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KCAP Financial, Inc., (NASDAQ:KCAP) shares have been in a solid uptrend as investors continue to seek high-yielding dividend stocks. However, a few rough days in the stock market lately have helped to create a pullback in the shares which is worth considering as a buying opportunity for income investors. This stock was hitting new 52-week highs at nearly $10 per share, but now can be bought for about 10% less at just $8.70 per share now. The strategy of buying dips in dividend stocks has been working well for at least the past couple of years and that trend is likely to continue as interest rates remain at record low levels. Here is a closer look at the company along with a few reasons to buy the recent pullback:

KCAP provides loans and makes equity investments in healthcare, manufacturing, real estate, transport, finance, electronics, and many other industries. A typical investment might also include high yield bonds and it even invests in distressed debt. These types of loans offer much higher yields and that allows KCAP to pay shareholders an extremely generous dividend yield of about 11%.

While KCAP does engage in some higher risk investments, it still keeps a focus on companies that are solidly profitable, with strong management teams and cash flow. This reduces risks for investors. While an 11% yield might not appear to be sustainable for some companies, it is reasonable to expect KCAP to keep paying higher than average yields. One reason for this is because the company uses leverage. By borrowing money at low rates and investing that money in higher-yielding investments, this company is able to keep offering shareholders a generous dividend.

KCAP Financial increased its dividend by about 33%, in the second quarter of 2012. The dividend jumped from 18 cents per quarter to 24 cents. This was made possible by strong financial results as second quarter investment income came in at about $9.5 million, which compares favorably with approximately $6.1 million in net income for the three months ended June 30, 2011.

Analysts at Zacks Equity Research recently upgraded this stock to a strong buy. Analyst upgrades can draw more investors to a stock and push the price higher. With the stock now trading near its 50-day moving average of about $8.93, this might be the ideal time to buy the dip since this is a key support level.

Here are some key points for KCAP:
Current share price: $8.86
The 52 week range is $5.51 to $9.70
Earnings estimates for 2012: 84 cents per share
Earnings estimates for 2013: 97 cents per share
Annual dividend: 96 cents per share which yields about 11%

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informational purposes only. You should always consult a financial

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.