U.S. Markets closed

Who’s Paying the Highest Dividends among Closed-Ended Funds?

Robert Karr

High Expectations for Closed-Ended Funds, but What's Driving Them?

(Continued from Prior Part)

Higher dividend payouts

Closed-ended funds (PEX) tend to pay higher dividends, with a dividend payout ratio in the range of 70%–90%, and related companies tend to have dividend yields in the range of 9%–20%.

Prospect Capital (PSEC) saw higher yields and lower originations in the December quarter. The company generated distributable income of $99.9 million, or $0.28 per weighted average share, exceeding $0.25 per share of dividends. Prospect’s ~16% dividend yield is highly competitive among its investment management peers.

By comparison, smaller closed-ended funds like Arlington Asset Management (AI) and Apollo Investment (AINV) have dividend yields of 21% and 18%, respectively. Alternative asset managers like Blackstone (BX) and Carlyle (CG) have dividend yields in the range of 4%–7%.

Ares Capital (ARCC) paid a dividend of $0.38 per share during the third quarter of 2015, which was on par with the dividend it paid the year before. With a dividend yield of ~12% and improving portfolio yields, the company may provide better returns to its shareholders over the next few quarters.

By comparison, BlackRock Capital Investment (BKCC) has performed well and carries a dividend yield of 9.7%. The company has focused on its net investment income growth and quality investments.

Valuations

Funds deploying higher leverage have seen sell-offs during the past one year. But this has been due to the expectation of further interest rate hikes by the Fed, which results in lower valuations.

Prospect Capital is currently trading at 5.2x on a one-year forward earnings basis. Overall the industry is trading at 7.6x on a one-year forward basis. Ares Capital is trading at 8x on a one-year forward earnings basis. Historically, the company has traded at a premium to its peers due to its quality portfolio and strategic partnership with GE Capital. Ares Capital has improved its average yield by investing in the second lien debt of companies with strong earnings profiles.

In the next part of this series, we’ll look at the particular approaches that asset managers of closed-ended funds have been taking.

Continue to Next Part

Browse this series on Market Realist: