I've been a regular investor in Stellus Capital Investment Corp. (SCM), a Business Development Company (BDC), and have been diligently compounding its attractive dividends. The power of reinvesting those payouts is undeniable for long-term wealth building, especially with a high-yield instrument like SCM.
However, after a recent deep dive into SCM's financials and a re-evaluation of my investment goals, I've decided to hit pause on the Dividend Reinvestment Plan (DRIP) for my SCM holdings. Let me be clear: this isn't a sell signal for my existing shares, but rather a strategic adjustment focused on capital preservation and future flexibility.
My primary concern has shifted from simply maximizing monthly income to ensuring the "rebound" of my initial investment. BDCs are unique, lending primarily to middle-market companies, and their dividends are directly tied to the interest income from their loan portfolios.
A key factor in my decision is the latest reported Net Asset Value (NAV) per share of $13.05, compared to SCM's recent trading price around $11.80. The stock is currently trading at a discount of nearly 10% to its underlying asset value. When you combine this with the fact that the regular quarterly dividend of $0.40 per share is currently not fully covered by the Core Net Investment Income (NII) of $0.34 per share, it signals a tighter margin for safety.
Continuing to reinvest dividends in shares that are trading below NAV, and from a dividend that is currently uncovered by core earnings, could mean buying into potential further depreciation.
By stopping the DRIP, I'm opting to take the dividends in cash. This gives me several advantages:
Capital Preservation: I'm not automatically committing more capital to a potentially falling asset if the market's concerns about SCM's portfolio or dividend sustainability prove accurate.
Flexibility: The cash dividends provide me with capital that I can deploy strategically. I can wait for a clearer sign of stabilization or recovery in SCM's price, or I can choose to diversify this cash into other opportunities that I believe have a stronger path to capital appreciation.
Risk Mitigation: It hedges against the risk of a dividend cut. If SCM is forced to reduce its payout, I won't have compounded shares at an unsustainable yield.
I will continue to hold my existing SCM shares, monitoring the company's performance, particularly its NII coverage and NAV. This move reflects a more conservative approach to my capital, prioritizing the long-term health of my investment over short-term income maximization.
Disclaimer: This blog post reflects my personal investment strategy and is for informational purposes only. It is not financial advice, nor is it a recommendation to buy, sell, or hold any security. All investment decisions should be made based on your own research, risk tolerance, and consultation with a qualified financial advisor.
