Why Dividends Matter: Prospect Capital

For a very clear example of why dividends matter, consider the case of Prospect Capital (PSEC). I first purchased Prospect in late 2014, believing it to be cheap at the time and that the risk of a dividend cut was overstated.

Well, it turns out I was wrong about the dividend. Shortly after I bought it, Prospect slashed its dividend by 25%. Predictably, the price took a tumble, but I decided to give the position a little more time. The yield was high even after the cut, and the stock traded below book value.

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I should have been more disciplined and sold the stock after the dividend cut, as it continued to drop for the next year. Even now, that initial position is down over 20% on a price basis. But when you adjust the price for dividends paid, you get a much different picture.

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Adjusted for dividends paid, Prospect Capital is up about 15% from my original purchase price. That’s by no means a great return (the S&P 500 is up about 22% over the same period). And I haven’t taken into account tax effects. But it does make the power of dividends abundantly clear. After dividends paid, a disappointing loser becomes a respectable winner.

Disclosures: Long PSEC.


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