In most cases, shareholders need to wait one quarter or a year
to receive dividend payments. But withFifth Street Finance (
), the payments come monthly.
Fifth Street is currently paying about 9.5 cents per share a
month, which works out to an annualized dividend yield of more
The firm is able to do that as a business development company,
a structure in which it pays no federal tax as long as it passes
at least 90% of taxable profits to shareholders.
This makes it similar to real estate investment trusts and
master limited partnerships, which also distribute most profits
to shareholders, and thus are an option for income-seeking
Business development companies, or BDCs, are like venture
capitalists, providing financing to companies in their early
stages, often with joint backing from private equity. Fifth
Street debuted on the Nasdaq in June 2008.
Of course, there's considerable risk in young companies. Dean
Choksi, head of investor relations, told IBD the portfolio is
among the lowest-risk in the BDC industry because it's comprised
of 79% senior securities and because of the way it's diversified.
Plus, most investments are originated and managed by the Fifth
Fifth Street Finance's stock hasn't been a screamer but it's
corrected no worse than 15% since 2012. The quarterly earnings
performance ranks among the steadiest in IBD's database.
In July, the firm took publicFifth Street Senior Floating Rate
), a BDC that invests primarily in senior secured loans. Because
it focuses on adjustable-rate debt, its returns figure to
increase if interest rates rise. Much of Fifth Street Finance
also has floating-rate debt. The new issue doesn't have
sufficient cash to pay a dividend yet.