Growing Income in Retirement: CSWC 4% Dividend Increase
When I purchase an income investment, I am not usually concerned with gaining from the sale of the investment. Rather, I am more interested in the dividend payout ratio, the frequency of the dividend, and the potential for increased dividend income. The current price of the investment doesn’t have to be more than what I paid for the shares, as share prices will rise and fall depending on the whims of investors and the business news, both good and bad.
Therefore, I am not afraid to invest in small-cap business development companies (BDCs). One of those investments is CSWC (Capital Southwest). Other BDCs we own include ARCC, MAIN, TSLX, OCSL, SLRC, NEWT, GAIN, and PNNT. GAIN and MAIN pay monthly dividends. One way to own a slice of all of these, and some others, is to buy shares of ETF BIZD (VanEck Vectors BDC Income ETF). We don’t own shares of BIZD, but I might own them if I ever wanted to accept quarterly income rather than monthly income from positions like GAIN and MAIN.
Which ETFs Hold CSWC?
Using the ETF Channel is one way to see which ETFs hold any stock position. It was easy for me to find BIZD using the following link: LINK
The following image shows the holdings of ETF BIZD.
Why Do I Like CSWC?
While some of the following may cause some investors heartburn, the details don’t discourage me from owning CSWC shares. First of all, I like the financials sector. I like companies engaged in asset management and loan creation. I like companies that can make a lot of money with a handful of employees. I like companies that have been around for 50+ years.
CSWC Sector Financials
CSWC Industry Asset Management and Custody Banks
Employees 23 Founded 1961
EPS (Earnings Per Share) are good, and the P/E ratio is sensible for a BDC. The dividend rate is healthy, but the dividend yield will scare away some investors, because a high yield can spell trouble in the future. Other investors don’t like small cap investments. They prefer large-cap value for safety or mid-cap growth for growth.
EPS (FWD) 2.09 – CSWC pays out most of their earnings in dividends.
PE (FWD) 8.56 – A price earnings ratio below 10.0 is sensible.
Div Rate (FWD) $2.00 – This assumes $0.50 per share per quarter.
Yield (FWD) 11.15% – normally this would be a warning flag. I believe the risk is moderate.
Short Interest 0.97% – Anything below 2% is acceptable in my opinion.
Market Cap $501.88M – this is a small small-cap financial stock
Volume 58,239 – volume is low. So expect wide price swings!
Perhaps the best way to show some of the reasons I like CSWC is to share four slides from a CSWC Investor Presentation:
Cindie and I hold 2,900 shares of CSWC as a long-term investment. Therefore, we will receive $1,508 in dividends on December 30, 2022. Estimated annual income from this investment (dividends only) is $6,032.
Company Profile: Capital Southwest Corporation (CSWC)
Capital Southwest Corporation is a business development company specializing in credit and private equity and venture capital investments in middle market companies, mezzanine, later stage, mature, late venture, emerging growth, buyouts, recapitalizations and growth capital investments. It does not invest in startups, publicly traded companies, real estate developments, project finance opportunities, oil and gas exploration businesses, troubled companies, turnarounds, and companies in which significant senior management is departing. In lower middle market, the firm typically invests in growth financing, bolt-on acquisitions, new platform acquisitions, refinancing, dividend recapitalizations, sponsor-led buyouts, and management buyouts situations. The investment structures are Unitranche debt, subordinated debt, senior debt, first and second lien debt, and preferred and common equity. The firm makes equity co-investments alongside debt investments, up to 20% of total check and only makes non-control investments. It prefers to invest in Industrial manufacturing and services, value-added distribution, healthcare products and services, business services, specialty chemicals, food and beverage, tech-enabled services and SaaS models. The firm seeks to invest in energy services and products, industrial technologies, and specialty chemicals and products. Within energy services and products, the firm seeks to invest in each segment of the industry, including upstream, midstream and downstream, excluding exploration and production with a focus on differentiated products and services, equipment and tool rental, consumable products, and drilling and completion chemicals. Within industrial technologies, it seeks to invest in automation and process controls, handling and packaging equipment, industrial filtration and fluid handling, measurement, monitoring and testing, professional tools, and sensors and instrumentation. Within and specialty chemicals and products, the firm seeks to invest in businesses that develop and manufacture highly differentiated chemicals and products including adhesives, coatings and sealants, catalysts and absorbents, cosmeceuticals, fine chemicals, flavors and fragrances, performance lubricants, polymers, plastics and composites, chemical dispensing and filtration equipment, professional and industrial trade consumables and tools, engineered solutions for HVAC, plumbing, and electrical installations, specified high performance materials for fire protection and oilfield applications. It may also invest in exceptional opportunities in building products. The firm seeks to invest in the United States. The firm seeks to make investments ranging from $5 to $25 million in securities. It seeks to make equity investments ranging from $5 million to $50 million and debt investments between $5 million and $20 million and co-invest in transaction size up to $40 million. It prefers to invest in companies with revenues approaching above $10 million, profitable operations, historical growth rate of at least 15 percent per year. Within the lower middle market, it seeks to invest in with less than $15 million in EBITDA and also opportunistically invests in the upper middle market, generally defined as companies with EBITDA in excess of $50 million. In addition to making direct investments, the firm allocates capital to syndicated first and second lien term loans in the upper middle market. Criteria for Upper Middle Market Syndicated 1st Lien is EBITDA Size more than $30 million, Closing Leverage greater than 4 times, investment hold size between $5 million and $7 million, investment yield greater than 6.5%. Criteria for Upper Middle Market Syndicated 2nd Lien is EBITDA Size more than $50 million, Closing Leverage greater than 6 times, investment hold size between $5 million and $7 million, investment yield greater than 9%. It prefers to take a majority and minority stake. The firm has the flexibility to hold investments for very long period in its portfolio companies. It may also invest through warrants. The firm prefers to take Board participation in its portfolio companies. Capital Southwest Corporation was founded on April 19, 1961 and is based in Dallas, Texas.
Wow. Coming from a manufacturing management background, I’m impressed with their selection of investment. Good find Wayne