Why Prospect Capital's 12.6% Yield Is a Great Deal in a Stalling Rate Environment

NEW YORK (TheStreet) -- Markets are in a transition period, moving from the typical summer doldrums to the more normal liquidity levels seen when the day trading community comes back in full strength for September. This summer, the S&P 500 finally broke the 2,000 mark and geopolitical turmoil in Russia and the Middle East inspired moves into safe haven assets. This has sent reactive instruments like the PowerShares DB US Dollar Index Bullish ETF  (UUP)   and the United States Oil Fund LP ETF  (USO)   to new highs, even as the SPDR S&P 500 Trust ETF  (SPY)   remains in firmly positive territory for the year.

So the real answers to where the market is headed next will likely be found in the outcome to the Fed's plans to discontinue its quantitative easing programs, as there are still significant questions that will need to be answered in order to construct a proper timeline for when interest rates are likely to start rising.

To accomplish this, most analysts have looked at the general state of the labor market and the positive trends that can be found in the declining unemployment rate. For most of the year, the U.S. economy has averaged 200,000 new job additions in its monthly non-farm payroll, and this has created a consensus expectation that puts the Fed in a position to start raising interest rates toward the middle of 2015.

Mounting Questions For Potential Strategies

In addition to the improved jobs numbers, the unemployment rate is has dropped to half-decade lows. This has helped give an upside boost to consumer confidence levels and broader retail spending, according to recent reports released by TradeSpoon. So next we have to ask: does this mean that the economy is truly ready for an environment of rising interest rates? And are investors prepared for the change in expectations if the Fed is not able to act as quickly as most analysts expect?

Slowing summer volatility can often lead to trader complacency, and there are reasons to suggest that these types of trends will continue this year as well.

So there is a wide variety of critically important questions that are mounting, and it makes sense for investors to take a step back and reconsider their long-term income investing strategies as we head into the final months of the year.

Specifically, should market analysts projecting new highs for the S&P 500 be focusing this intently on the state of the labor market? Recent studies on the changing nature of statistical surveys have discussed developing trends in household response behaviors for economic studies themselves, and the troubling conclusion could lead to more negative projections in key metrics like the national unemployment rate.

All of this means that the Fed could have a much more difficult task ahead in maintaining its timeline for the normalization of its interest rate policy. If you are an investor looking for yield opportunities, this means you your options will be more limited when you consider your positioning prospects for the next few quarters.

So what should investors do?

Long-Term Yield Plays: Prospect Capital Still Stands Out

(Chart Source: CornerTrader)

When we view the market from this standpoint, one of the most attractive "prospects" is Prospect Capital (PSEC) , as the company has what might be the best available track records in sustaining elevated dividend payouts to its investors.

Those invested in Prospect Capital are able to gain exposure to the business development company space, which is an often overlooked (but highly important) section of the market.

But what is most attractive about the stock is its massive 12.6% dividend yield that compounds monthly -- and this can make a significant difference when viewing comparative long-term returns for dividend stocks that compound less frequently (i.e., quarterly or yearly).

Alternatively, ETF investors are able to gain exposure to the stock through the BDC Income ETF (BIZD) , as PSEC is nearly 8.5% of that fund.

Recent announcements have confirmed that these payouts will continue until the end of this year, and the company's next earnings period will likely be accompanied by similar statements extending this through to March 2015. Last month's announcement that Prospect will start to show a 5% increase in commitments for revolving credit facilities led to a sharp sell-off in the stock. At Tuesday's close, PSEC traded at $10.31 -- significant because this is roughly 3.6% below the company's stated NAV in its most recent earnings report ($10.68).

This creates a buying opportunity for the stock, as the company is still positioned well when looking at most of the commonly watched metrics. The latest quarterly results showed net income above $247 million, which was a massive 30% improvement relative to what was seen for the same quarter last year. For investors looking for long-term opportunities in stocks that pay high dividends, performances like these will provide the positive momentum needed to brighten the growth outlook as well.

In Prospect Capital, dividend investors have a much more attractive vehicle for playing the low-interest rate environment that is likely to remain in place until at least next year. Few stocks with a double-digit dividend yield have a payout history that is equal to what can be found in Prospect Capital.

This makes it a no-brainer for those looking to reach hard-to-find income opportunities in what could still be a stalling rate environment for the U.S. economy.

Find more from Sam Kikla at Best Credit.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates PROSPECT CAPITAL CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate PROSPECT CAPITAL CORP (PSEC) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, compelling growth in net income, expanding profit margins, impressive record of earnings per share growth and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

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