Business Development Companies, or BDCs, are a popular investment class among income investors. BDCs pay dividend yields that far exceed the yields available from other asset classes.
For example, the S&P 500 Index has a 2% dividend yield, on average. High-quality bonds aren’t much better—the 10-year U.S. Treasury Bond yields just 2.3% right now. Compare these puny yields with Harvest Capital Credit Corporation (HCAP), a BDC with a dividend yield nearing 10%. Harvest is one of 405 stocks with a 5%+ dividend yield. You can see the full list of established 5%+ yielding stocks here.
Not only that, but Harvest pays its dividend each month, rather than each quarter like most companies. You can see the entire list of all 34 monthly dividend stocks here. Of course, just because a stock has an attractive high dividend yield, does not automatically make it a good investment. Investors must evaluate the sustainability of a dividend payout, especially for such extreme high-yielding stocks.
This article will discuss Harvest’s business model, and whether the dividend appears to be sustainable going forward.
Business Overview
Harvest is a Business Development Company, or BDC. It makes investments in lower middle-market companies, that are usually at an early stage in their growth cycles.
It has a very large and diversified investment portfolio, across several various industries.
Source: Investor Presentation, page 7
Harvest makes a variety of debt and equity investments, including senior secured debt, uni-tranche term loans, junior secured term loans, subordinated debt, and minority equity co-investments. It typically invests in companies with annual revenue of $10 million-$100 million. The vast majority (96%) of the company’s investments are in secured debt:
Source: Investor Presentation, page 8
Harvest ended 2016 with 31 investments in the portfolio, 28 of which were debt investments. The primary driver of Harvest’s profitability is investment income derived from its portfolio. Net investment income rose 3.9% last year, to $1.60 per share.
