Can Your Investments Pay Your Property Taxes?

Cindie and I pay property taxes for our home in Fitchburg. We have been doing that since 1999 when the annual amount was $5,468.78. That wasn’t a small tax bill, but the most recent one was for $10,004.34. Sadly, most of that goes to the public schools and I’m not convinced that taxpayers are getting good returns on that investment. (My apologies to the good teachers! I’ve met some that are great.)

In any event, that means our monthly tax cost is about $833. Our dividends from our CSWC investment almost completely cover the property taxes for the year.

You may recall a recent post where I discussed another monthly dividend payer. MAIN also pays a monthly dividend, and that dividend covers our groceries. This is important because I don’t want to sell any investments to raise cash to buy groceries or to pay the annual property tax bill.

CSWC Ten-Year Total Returns

If you look at CSWC’s price returns you should conclude that it probably isn’t a great investment. However, because CSWC pays generous dividends, you must examine total returns. When you do that you see an entirely different picture. CSWC’s ten-year returns are almost 370%. If you compare that to the returns of the S&P 500 you will find CSWC out-performs the index.

Furthermore, if you add income from options trades into the mix, your profit can increase. Although I don’t frequently trade options on CSWC, it is possible to create some income trading covered call options.

Capital Southwest Dividend

Just like my recent post about BDC MAIN, the most recent CSWC dividend announcement included the following four dividends. Three of them are monthly and are $0.1934 per share. The last one is “supplemental” and it is $0.06 per share. Supplemental dividends are unique and should not be considered repeatable. However, they are a nice present when they are paid. Here are the four announcements:

Capital Southwest (CSWC) declares $0.1934/share monthly dividend, in line with previous.

  1. Payable April 30; for shareholders of record April 15; ex-div April 15.
  2. Payable May 29; for shareholders of record May 15; ex-div May 15.
  3. Payable June 30; for shareholders of record June 15; ex-div June 15.
  4. The company also declared a quarterly supplemental dividend of $0.06 per share with date payable June 30; for shareholders of record June 15; ex-div June 15.

Cindie and I own 4,200 shares of CSWC. Therefore, the supplemental dividend we will receive on June 30 will be $252. Then, each month from April through June we will also receive a monthly payment of $812.28. That easily covers our current property taxes for the year.

More About CSWC

Capital Southwest Corporation is a business development company. The firm specializes in credit and private equity and venture capital investments in lower middle market companies, mezzanine, later stage, mature, late venture, emerging growth, buyouts, industry consolidation, recapitalizations and growth capital investments. The firm 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 buyout 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 percent of total check and only makes non-control investments. The firm is industry agnostic, but 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 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 and North America. The firm seeks to make investments ranging from $5 million to $25 million in securities. Its typical financing size is between $5 million and $75 million, target hold size is between $5 million and $45 million, and the firm is willing to backstop up to $55 million with an active network of co-investors. It seeks to invest in firms with minimum EBITDA between $3 million and $25 million. In addition to making direct investments, the firm allocates capital to syndicated first and second lien term loans in the upper middle market. It prefers to take a majority or minority stake.

The firm has the flexibility to hold investments for very long periods 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.

Caution for the Novice

If you dislike price volatility, then BDCs are not for you. For example, CSWC’s shares dropped 4.04% today. Another BDC, MAIN, dropped 2.22%. ARCC’s shares dropped 3.42%. Anytime you buy an investment you need to think long-term. Realize many investors are thinking only about this week or this month. If you don’t have a five-year view, you are frequently likely to be fearful or at least disappointed.

Not all BDCs are good investments. A Business Development Company (BDC) is not without risk. CSWC is a BDC. A BDC is a type of investment firm that primarily invests in small and mid-sized businesses, providing them with capital and managerial support to help them grow. BDCs are publicly traded and must adhere to specific regulations, including investing at least 70% of their assets in eligible companies.

Conclusion

If you enter the BDC investment space, I suggest that you focus your dollars on three good ones instead of trying to buy shares of just one or of many. Focus on those with a track record and that have a rational dividend.

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