Can Saratoga Investment Corp. Maintain Its 12% Yield?

You may not have heard of Saratoga Investment Corp (NYSE: SAR), a small cap business development company (BDC), but its shareholders undoubtedly love its 12% yield.

But will that 12% yield stick around long enough to put the company on more investors’ radar?

The New York-based BDC lends money to businesses that aren’t able to get bank loans. It lends to businesses in a variety of sectors including healthcare, technology, consumer services, and more.

Because it’s a BDC, the measure of cash flow that we use is net interest income, or NII.

Its latest fiscal year, which ended in February, saw a slight setback when NII declined 7%. That was after several years of strong growth.

In the current fiscal year, NII is forecast to grow 19%. Even though that’s a positive, the Safety Net Model is a stern taskmaster and doesn’t stand for disappointment. The decline in the last fiscal year costs Saratoga a one-grade penalty.

In the last fiscal year, Saratoga paid shareholders $40.7 million in dividends for a payout ratio of 77%. This fiscal year, the payout ratio is forecast to dip to 74%. BDCs are only penalized on payout ratios above 100%. So Saratoga’s payout ratio is healthy.

Its dividend history is decent. The only hiccup was in 2020, during the pandemic, when it reduced the dividend from $0.56 to $0.40. Other than that, not including special dividends, the BDC has raised the payout every year.

Earlier this year, the company switched to a monthly dividend from quarterly. It now pays $0.25 per share each month, which comes to $3.00 per year or a 12.3% yield.

The cut in 2020 hurts the safety rating – as does the decline in NII last year. Should fiscal 2026’s NII come in above last year’s $53 million as expected, that penalty for the decrease in cash flow will go away. So, it’s very possible Saratoga Investment Corp. will get an upgrade next year.

But until it shows that NII has in fact grown in the current year, the dividend safety rating expresses that there is moderate risk to the dividend.

Dividend Safety Rating: C