Snacking On Prospect Street
To begin, I should disclose that I don’t invest for dividends. I invest for stock price appreciation. In fact, I’m so strict about this, that I don’t even take a company’s dividend into consideration when I buy it. If it has one, and I happen to be holding it for a distribution period, great. Bonus. Period. With that said, I recently purchased some shares of Prospect Street High Income Portfolio (PHY). Under normal circumstances one would only buy this for its dividend, but not I said the fly. I bought it because other people buy it for its dividend. Huh? I bought it because after examining a few years’ worth of activity I discovered that by and large, over the last couple of years, its yield has averaged about 8.8%, and even though this is the average, it more often has a yield closer to 8.5% or even a bit less. To see this history and some other interesting things, take a look at the following two-axis graph showing the share price and the yield together:
As you can see, because their dividend is so consistent, the two lines are almost perfect inverses. So why the high present yield? Two words: Junk bonds. Non-investment grade bonds. How fun. So, as the credit-whatever-you-want-to-call-it thingy (I’ve now heard over thirty-seven variations including the words “crisis,” “woe,” “crunch,” “fiasco,” etc) continues to weigh on peoples’ minds, companies that are involved in anything credit-related are being reexamined as having higher risk. With this stock, we can only assume that buyers or prior owners anticipated that the dividend would drop. If we pull out our calculators here, in order for the current stock’s price to justify the more justifiable yield, the dividend would have to drop all the way to 25 ¢ per share per year, or to just 2.1 ¢ per share per month, in other words, down more than 12%. Ouch. However, this hasn’t happened. The dividend has stayed consistent throughout the year. In fact, the last time the dividend changed, it went up—it’s been going up about 5% per year for years.
If we can assume that the management team is always concerned about it’s own performance and perception to the marketplace and if we can assume that the amount of cash they have is growing at least as fast as their dividend payout has been, then we should be able to assume that the dividend will keep on coming. We should be able to assume that even given the current market circumstances, they have plenty of elbow room. But remember, I’m not here for the dividend. I’m here because I think the current yield is too high. I think it doesn’t justify the increased risk a higher yield should indicate because I don’t think that risk is there. Of course, the market seems to be disagreeing with me at the moment. 
So, regardless of that dividend for my sake, I think the yield will prove to look enticing for others who are looking for the dividend—so enticing in fact that I expect the price to appreciate somewhat significantly which will bring the yield back in line. What’s even better is that they often increase the dividend in March. So here are some hypothetical scenarios: If the dividend does stay the same, in order for the yield to come back to even the high range of 8.8%, the stock price will have to go all the way up to $3.25 which would be a 16% gain over my initial and future entry points. So long as it keeps falling under around $2.80. I’ll snap a few up. Even better though is if they do in fact raise the dividend in March from 2.4 ¢ per share to 2.5 ¢ per share, the share price will have to rise all the way to $3.39 which would be a 21% gain. In the meantime, hell, I might even earn some of those dividends. If a quarter passes prior to the yield correction that I am anticipating, I can tack on another 2.5-3% on top of those gains. Might be Merry Christmas after Christmas.