Monthly Dividend Stock In Focus: Stellus Capital

Up to date on April eleventh, 2025 by Nathan Parsh

Because the saying goes, if one thing seems too good to be true, it normally is simply that. This could typically be utilized to unusually high-yielding dividend shares, lots of which have to chop their dividends in a recession.

For instance, Stellus Capital Funding Corp. (SCM) has a dividend yield of greater than 13%, which may be very enticing on the floor. The S&P 500 Index, on common, has a dividend yield of simply 1.4%.

Not solely that, however Stellus pays its dividend every month fairly than every quarter, like most firms. This helps to make Stellus stand out, as we presently cowl 76 month-to-month dividend shares.

You possibly can obtain the complete checklist of month-to-month dividend shares (together with vital monetary metrics resembling dividend yields and payout ratios) by clicking on the hyperlink under:

Nevertheless, whereas excessive dividend shares attraction in a comparatively low-rate setting, buyers should make sure the dividend is sustainable.

Stellus has a really excessive anticipated payout ratio of greater than 100%. As a BDC, Stellus is required to distribute basically all of its earnings, so its payout ratio will at all times be excessive. Nevertheless, it’s in buyers’ greatest pursuits to fastidiously monitor the corporate’s earnings efficiency for indicators {that a} reduce within the distribution could also be coming.

This text will talk about Stellus’ fundamentals as they pertain to supporting its excessive dividend yield.

Enterprise Overview

Stellus is a Enterprise Improvement Firm (BDC) that invests in small, predominantly non-public firms which are normally at an early stage of their development cycles.

Stellus is a middle-market funding agency that makes fairness and debt investments in non-public middle-market firms. The corporate offers capital options to firms with $5 million to $50 million of EBITDA and does so with varied devices, the vast majority of that are debt.

Stellus offers first lien, second lien, mezzanine, convertible debt, and fairness investments to a various group of shoppers, usually at excessive yields, within the US and Canada.

Supply: Investor Presentation

It additionally has a extremely diversified funding portfolio, each geographically and when it comes to business focus. Stellus will make varied debt investments, together with first lien, second lien, uni-tranche, and mezzanine financing.

The investments are positioned in varied industries, together with enterprise providers, industrial, healthcare, know-how, vitality, client merchandise, and finance. Invested capital is used for a variety of functions, together with acquisitions, development investments, and extra. Stellus is externally managed by Stellus Capital Administration LLC, a registered funding advisor.

The corporate follows a disciplined funding technique. In prior years, it closed solely about 2% of offers reviewed. Its relative selectiveness permits the corporate to deal with the highest-quality investments.

It additionally means the corporate has way more funding alternatives than it wants, enhancing its skill to pick out solely the perfect investments. Stellus generates significantly excessive yields from its first lien, second lien, and unsecured debt investments.

Subsequent, we’ll check out the corporate’s development prospects.

Progress Prospects

A powerful catalyst for Stellus is its rising funding portfolio. Over the previous 5 years, Stellus has seen its portfolio rise quickly, permitting the corporate to earn increased funding earnings.

Nevertheless, this all stopped in 2020 because the coronavirus pandemic despatched the U.S. financial system right into a deep recession, negatively impacting lots of Stellus’ investments.

The corporate reported its monetary outcomes for the fourth quarter of 2024 on March 4th, 2025. Web funding earnings was $9.6 million, or $0.35 per share, down from $11.9 million, or $0.49 per share, within the prior 12 months. The corporate’s mortgage portfolio had a ten.3% yield, and buyers have obtained the equal of $16.95 per share in distributions since inception.

The corporate funded $109 million of investments throughout the quarter and obtained $65 million of repayments, ending the 12 months with a complete portfolio truthful worth of $953 million.

Dividend Evaluation

So far as dividend shares go, Stellus just isn’t a typical selection. Its dividend historical past is fewer than 10 years, which suggests it has not but developed an extended observe report of consistency.

You possibly can see a picture of the corporate’s distribution historical past under:

Supply: Investor Presentation

Stellus presently pays a month-to-month dividend of $0.1333 per share, equating to an annualized payout of $1.5996. The corporate reduce its dividend in mid-2020 as a result of pandemic. On a optimistic word, Stellus has paid out particular distributions up to now to complement its enticing month-to-month dividend additional, however this final occurred in 2022.

Web funding earnings is anticipated to come back in at $1.50 per share for 2025. With the present annualized dividend of $1.5996, Stellus presently has a payout ratio of 107%. This implies the present dividend payout is exceeding what the corporate brings in at this level. Keep in mind that BDCs are required to distribute almost all of their earnings, so Stellus’ payout ratio will at all times be excessive.

Even a modest decline in funding earnings might trigger the payout ratio to rise even increased than already projected, which indicators a probably unsustainable dividend.

As its current outcomes point out, Stellus should proceed to extend its investments. Stellus is a high-risk, high-reward dividend inventory. If the corporate’s development stays on observe, buyers will obtain a ~13.4% return from the dividend, plus any capital appreciation from a rising share value.

Even when the corporate maintains its dividend, buyers shouldn’t anticipate a lot dividend development going ahead. Web funding development has been sluggish, and given the excessive payout ratio, we don’t see any catalysts for a better payout within the close to future.

Closing Ideas

Stellus could possibly be a gorgeous decide because it has a 13%+ dividend yield and a few measure of development potential.

Plus, Stellus pays its dividend every month, which helps increase the compounding impact of reinvested dividends and enhances the inventory’s attractiveness to those that depend on dividends for dwelling bills.

After all, there isn’t a assure the corporate’s development plans can be profitable and with a payout ratio above 100%, there’s not a lot room for error. In consequence, buyers should settle for the chance of a future dividend reduce if monetary outcomes deteriorate. Solely buyers keen to take this threat ought to take into account shopping for the inventory.

Don’t miss the assets under for extra month-to-month dividend inventory investing analysis.

And see the assets under for extra compelling funding concepts for dividend development shares and/or high-yield funding securities.