Monthly Dividend Stock In Focus: Stellus Capital

Updated on April 11th, 2025 by Nathan Parsh

As the saying goes, if something looks too good to be true, it usually is just that. This can often be applied to unusually high-yielding dividend stocks, many of which have to cut their dividends in a recession.

For example, Stellus Capital Investment Corp. (SCM) has a dividend yield of more than 13%, which is very attractive on the surface. The S&P 500 Index, on average, has a dividend yield of just 1.4%.

Not only that, but Stellus pays its dividend each month rather than each quarter, like most companies. This helps to make Stellus stand out, as we currently cover 76 monthly dividend stocks.

You can download the full list of monthly dividend stocks (along with important financial metrics such as dividend yields and payout ratios) by clicking on the link below:

However, while high dividend stocks appeal in a relatively low-rate environment, investors must ensure the dividend is sustainable.

Stellus has a very high expected payout ratio of more than 100%. As a BDC, Stellus is required to distribute essentially all of its income, so its payout ratio will always be high. However, it is in investors’ best interests to carefully monitor the company’s earnings performance for signs that a cut in the distribution may be coming.

This article will discuss Stellus’ fundamentals as they pertain to supporting its high dividend yield.

Business Overview

Stellus is a Business Development Company (BDC) that invests in small, predominantly private companies that are usually at an early stage in their growth cycles.

Stellus is a middle-market investment firm that makes equity and debt investments in private middle-market companies. The company provides capital solutions to companies with $5 million to $50 million of EBITDA and does so with various instruments, the majority of which are debt.

Stellus provides first lien, second lien, mezzanine, convertible debt, and equity investments to a diverse group of customers, generally at high yields, in the US and Canada.

Source: Investor Presentation

It also has a highly diversified investment portfolio, both geographically and in terms of industry concentration. Stellus will make various debt investments, including first lien, second lien, uni-tranche, and mezzanine financing.

The investments are placed in various industries, including business services, industrial, healthcare, technology, energy, consumer products, and finance. Invested capital is used for a wide range of purposes, including acquisitions, growth investments, and more. Stellus is externally managed by Stellus Capital Management LLC, a registered investment advisor.

The company follows a disciplined investment strategy. In prior years, it closed only about 2% of deals reviewed. Its relative selectiveness allows the company to focus on the highest-quality investments.

It also means the company has far more investment opportunities than it needs, enhancing its ability to select only the best investments. Stellus generates particularly high yields from its first lien, second lien, and unsecured debt investments.

Next, we’ll take a look at the company’s growth prospects.

Growth Prospects

A strong catalyst for Stellus is its growing investment portfolio. Over the past five years, Stellus has seen its portfolio rise rapidly, allowing the company to earn higher investment income.

However, this all stopped in 2020 as the coronavirus pandemic sent the U.S. economy into a deep recession, negatively impacting many of Stellus’ investments.

The company reported its financial results for the fourth quarter of 2024 on March 4th, 2025. Net investment income was $9.6 million, or $0.35 per share, down from $11.9 million, or $0.49 per share, in the prior year. The company’s loan portfolio had a 10.3% yield, and investors have received the equivalent of $16.95 per share in distributions since inception.

The company funded $109 million of investments during the quarter and received $65 million of repayments, ending the year with a total portfolio fair value of $953 million.

Dividend Analysis

As far as dividend stocks go, Stellus is not a typical choice. Its dividend history is fewer than 10 years, which means it has not yet developed a long track record of consistency.

You can see an image of the company’s distribution history below:

Source: Investor Presentation

Stellus currently pays a monthly dividend of $0.1333 per share, equating to an annualized payout of $1.5996. The company cut its dividend in mid-2020 due to the pandemic. On a positive note, Stellus has paid out special distributions in the past to supplement its attractive monthly dividend further, but this last occurred in 2022.

Net investment income is expected to come in at $1.50 per share for 2025. With the current annualized dividend of $1.5996, Stellus currently has a payout ratio of 107%. This means the current dividend payout is exceeding what the company brings in at this point. Remember that BDCs are required to distribute nearly all of their income, so Stellus’ payout ratio will always be high.

Even a modest decline in investment income could cause the payout ratio to rise even higher than already projected, which signals a potentially unsustainable dividend.

As its recent results indicate, Stellus must continue to increase its investments. Stellus is a high-risk, high-reward dividend stock. If the company’s growth stays on track, investors will receive a ~13.4% return from the dividend, plus any capital appreciation from a rising share price.

Even if the company maintains its dividend, investors should not expect much dividend growth going forward. Net investment growth has been sluggish, and given the high payout ratio, we don’t see any catalysts for a higher payout in the near future.

Final Thoughts

Stellus could be an attractive pick as it has a 13%+ dividend yield and some measure of growth potential.

Plus, Stellus pays its dividend each month, which helps boost the compounding effect of reinvested dividends and enhances the stock’s attractiveness to those who rely on dividends for living expenses.

Of course, there is no guarantee the company’s growth plans will be successful and with a payout ratio above 100%, there is not much room for error. As a result, investors must accept the risk of a future dividend cut if financial results deteriorate. Only investors willing to take this risk should consider buying the stock.

Don’t miss the resources below for more monthly dividend stock investing research.

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