Horizon Flat Again

So I own a few shares of Horizon Technology Finance Corp. They recently announced the monthly dividend of .115/share. This has been the same since they went to monthly payouts in 2013. This purchase was back before I knew too much so I bought it based on 3 things.
  1. High dividend yield. Currently around 9.65
  2. Dividend frequency. Thought it would build compound faster at a monthly rate
  3. Share price. Thought I could buy more shares initially which would help in the long run. But it doesn't lead to greater returns in the long run. My post on does price matter shows some good examples.
What I know today that would have deterred me from this stock.
  1. Do more research when the yield is higher than 4%. Sometimes there are reasons and sometimes it is a sign of a bad or declining company.
  2. The payout ratio has been way above 100% since 2012. A good investor should focus on companies that keep this below 75% unless it is a REIT or MLP. Horizon is a finance company loaning out money to various types of companies. Not sure if this is typical for this type of company but do you really want to own a company borrowing money to pay you a dividend.
  3. The dividend hasn't grown at all in recent years. Unless we have negative inflation this will not keep up with it. It is also another warning sign that the company isn't generating enough profits and passing them along to shareholders. At least they haven't cut it yet :-0
For now I don't have too much money invested in it. So I will stay long on HRZN until the dividend is cut. All signs point to yes but we will just have to wait and see.

Full Disclosure: Long on HRZN

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Comments

  1. The dividend yield on Horizon is really nice. And the monthly dividend makes it all more tempting. Another company that might peek your interest is Student Transportation (STB). They too pay a monthly dividend.

    ReplyDelete
  2. Almost 10% yield, wow! It makes sense that the payout-ratio is well over 100% then.

    Enjoy the yield for as long as its lasts, DFG!

    ReplyDelete
    Replies
    1. Thanks, NMW. I will. But in the future won't touch companies like this unless I understand them better.

      Delete
  3. DFG,

    I have owned HRZN for awhile. Most BDC's have high payout ratios because the same tax laws apply to them as REITs and MLPs. The payout ratio is high and there is risk, but there is also undistributable spillover income from 2013. These companies are not easy to understand, but I like what they do. They may be financing the next big company in its early stages by lending and investing in them.

    ReplyDelete
    Replies
    1. Thanks for the info SWAN. That makes more sense. I liked them because of the sectors they are invetesting in (Healthcare &Technology). Like you said there is the risk that some of these companies will fail.

      Delete

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