Having a Cake I Can Eat

Wayne’s Easy Income Strategy includes high yield BDC investments. I want to eat my cake.

When it comes to investing, can you have your cake and eat it too? The proverb about not having your cake and eating it too literally means “you cannot simultaneously keep a cake and also eat it”. Once the cake is eaten, it is gone. “It can be used to say that one cannot have two incompatible things, or that one should not try to have more than is reasonable.” – Wikipedia

Some investments might look like they will be consumed and, therefore, become worthless. Today’s EIS (Easy Income Strategy) investment looks like a cake that might be entirely eaten. This is due to the fact that it is a micro-cap, business development company with a very high dividend yield. In general, high yield is a warning signal that your cake might not be good for the long haul. Let me suggest that TSLX (Sixth Street Specialty Lending Inc) is a cake you can own and eat.

EIS Investment Number Four

This is the fourth in the series. My goal is to present arguments in favor of a simplified and uncomplicated way to have income before and in retirement that grows even if we do nothing.

The best way to help you see how easy money works is by example. Today’s example focuses on a business development company (BDC). Sixth Street Specialty Lending Inc is one of our financial investments.

TSLX is a good income investment for the long-term investor.

In each of these educational posts I discuss: 1) The nature of the investment, 2) The reason it may qualify as easy money, 3) The quality of the investment using outside resources to help gauge quality, and the 4) Factors that determine if and when I buy shares of the investment. In each case I will be talking about an investment that we own.

The Nature of TSLX

Did you ever look at a business and think, “This is a very risky proposition?” It is certainly true that many smaller businesses are higher risk investments. I don’t think TSLX is in that group.

TSLX profile and profitability

Sixth Street Specialty Lending, Inc. (NYSE: TSLX) is a business development company. The fund provides senior secured loans (first-lien, second-lien, and unitranche), unsecured loans, mezzanine debt, and investments in corporate bonds and equity securities and structured products, non-control structured equity, and common equity with a focus on co-investments for organic growth, acquisitions, market or product expansion, restructuring initiatives, recapitalizations, and refinancing. The fund invests in business services, software & technology, healthcare, energy, consumer & retail, manufacturing, industrials, royalty related businesses, education, and specialty finance. It seeks to finance and lending to middle market companies principally located in the United States. The fund invests in companies with enterprise value between $50 million and $1 billion or more and EBITDA between $10 million and $250 million. The transaction size is between $15 million and $350 million. The fund invests across the spectrum of the capital structure and can arrange syndicated transactions of up to $500 million and hold sizeable positions within its credits.

Why I Think TSLX Qualifies using EIS*

On the surface, looks like a high-risk investment. The Seeking Alpha QUANT rating, Fidelity ESS, StockRover, and Weiss ratings are all, at best, average. But this is a gem in many ways. The next four images were taken from the TSLX web site presentation regarding the business model.

TSLX Borrower Diversification
TSLX Representative Themes
TSLX Portfolio Growth and Top Ten Exposure
TSLX Book Value Per Share and Dividends Paid

Notice that this is a diversified business model. Notice too that the top ten borrowers are not a large portion of the total mix. When you look at the logos, you may see some that are a higher risk, but there is good diversification in software, retail, energy, and pharmaceuticals. Finally, notice both the growth in the dividend and the special dividends on a cumulative basis.

TSLX Ratings from Seeking Alpha, Fidelity, StockRover and Weiss Ratings

The Quality of the Investment

One of the reasons I like TSLX is the result of our ownership experience. I purchased 400 shares on 10/31/2017. The total cost basis of the 1,750 shares we currently own is $37,119. However, the shares are now only worth about $33,000. You should rightly question my sanity. If I have owned shares since 2017, and they are worth less than what I paid for them, how can this be a good investment? This is missing one critical piece of information. Since late 2017 we have received $16,385.75 in dividends. In just over five years, the original $37K has given us $16K of spendable income.

Always remember it is “dividends plus the value of the investment.” Total returns can grow if you reinvest the dividends.
There are two dividends: the quarterly dividend and a supplemental dividend.

Factors I Consider Before Buying

I won’t restate the factors I use, but you can see them in the earlier posts of this series. TSLX is certainly not a growth investment. It doesn’t even come close to ranking in the top ten investments in its sector or industry group. In fact, a strong argument can be made that BDCs ARCC, MAIN, CCAP, and SAR are better choices. One thing you will notice, if you look at all five of these (including TSLX) is that they are high yield investments. High yield can be a powerful addition to your easy income portfolio.

TSLX Looks Like it has gone nowhere for five years. That view neglects an understanding of the huge dividends.

We own all of those as well. Our investment in ARCC is currently worth $95,950, in MAIN it is $128,805, CCAP is $2,317, and SAR is $22,040.

Reminder: What is EIS?

EIS is my abbreviation for “Easy Income Strategy.” Each value needs to be at least a “3” or I will pause and not rush to buy. If most of the values are “4” or “5”, I will either buy, or continue to hold or add more shares. Therefore, “5” is a strong reason to buy, “4” is a good reason to buy, and anything lower than a “3” is a cause for potential concern.

Conclusion

Business Development Company investments can throw off a lot of dividends. If you don’t need to sell an investment and can hold it for the long-term, then BDCs are an excellent addition to your portfolio.

TSLX Dividend History Graphs

Full Disclosure

Cindie and I own a combined total of 1,750 shares of TSLX. Those shares are worth approximately $33,000. Therefore, TSLX is NOT one of our top ten investments and it also is not our top BDC investment. Always bear in mind that our ownership is not a recommendation to buy the investment. Always align your investment purchases with your written investment goal, strategy, and rules for each investment you make. Suffice it to say, if we invest in something, it is certainly the result of focusing on our goal and strategy.

The Easy Income Strategy – What is Easy Income?

We need to define “easy.” When I say easy, I don’t mean there is no work involved. Rather, the term is meant to convey simplified, unhurried, user-friendly, and uncomplicated. Therefore, it isn’t about trying to sell something, and it certainly isn’t about trading options. It also isn’t about trying to time the market with a buy low and sell high strategy. It is about a process that results in income, and the primary goal is to minimize the time spent while maximizing income that grows over time.

Easy Money is Easy

Easy money is money you can easily acquire. It is income obtained with a minimum of effort. It sounds too good to be true. In fact, most of the time when someone pitches something that is too good to be true, it isn’t true. I think there are some exceptions.