I’m Buying This 11% Dividend That’s 116% Covered

Today I'm going to talk about the newest holding in my high yield dividend portfolio, which is currently offering an 11% dividend yield that's over 116% covered by their most recent earnings. I'll discuss what makes it such an appealing investment in my opinion, as well as the risks involved with holding it. The stock I just bought is Fitus Investment Corporation, ticker FDUS. It's a business development company launched by Fitus Capital back in 2011. They provide customtailored debt and equity financing solutions for lower middle market companies which includes leverage buyouts, refinancings, acquisitions, and growth capital. They avoid investing in turnarounds or distress situations, but will lend to companies in special situations with high downside protection or asset support. As of August of 2026, they're invested in 100 companies. 81.3% of their portfolio is in first lean debt, which is the highest priority debt. They allocate a small 7% toward equity investments, which includes preferred stock, common stock, and or warrants. Their nonacrruals are currently less than 1% of their portfolio at fair value and they have a high amount of spillover according to their latest earnings call. But what makes Fitus more appealing than most companies in this sector? What I just described could be attributed to a number of business development companies. They don't have a large equity portfolio like Main Street and they aren't one of the biggest companies in this sector like Aries Capital. They're actually in the middle when it comes to market cap. But what makes Fitus an appealing business development company and what appealed to me the most is their dividend policy. As it's been pointed out, this BDC hasn't offered as much in terms of base dividend growth. They were one of a handful of companies in this sector that did experience a dividend cut back in 2020, but they grew it back to higher than before the pandemic. That was the only dividend reduction in its 15-year history, but they haven't delivered the same distribution growth as companies like Blackstone Secured Lending or Trinity Capital. And that's because Fitus is much more conservative when it comes to increasing their dividends, which is something that I find really appealing. I'm the kind of investor that is willing to put up with a little slower growth for dividend stability, especially if we're talking about high yielding investments. But where Fightus really shines for an investor like myself is how they determined their payout, which they updated their policy back in 2021 and revised it again in 2022. This company uses a formuladriven supplemental dividend framework. The formula originally dictated that the quarterly supplemental dividend would equal 50% of the surplus in adjusted net investment income. In other words, if Fitus earns enough in the previous quarter to more than cover the dividend, they would pay out 50% of all additional adjusted income earned over the base dividend. So if their dividend was 43 cents per share and they earned adjusted NII of 53 cents for the quarter, Fitus would pay their 43 cent base dividend and issue a 5cent bonus dividend. In 2022, the board revised the formula and they now pay out 100% of all surplus adjustable earnings in the form of bonus dividends. We can see that this company has paid a bonus dividend every quarter since December of 2020, and it's ranged anywhere from 4 cents to 37. This payout policy adds a tremendous amount of clarity when it comes to their dividend coverage. In 2023, it certainly looked like they could have grown their base dividend more aggressively. If you have 37 additional cents of NI, you would have had the room to bump that base dividend up by at least 5 or 10 cents while still being conservative. And that's what so many BDC's did and are now having to reduce their dividends because they were too aggressive in growing it. Fitus chose to pay significant bonus dividends instead of growing their base dividend. A move they're most certainly grateful for now given the environment. This gives us a really good picture into how well their dividend is covered. With a number of BDC's right now, we've been seeing them report earnings for the past few quarters that haven't covered their base dividend. To give one example, Rand Capital here hasn't earned enough NII to cover their base dividend for the past few quarters. The question everyone who's invested in this company, I'm sure, is asking is how long can the company keep this dividend up before they have to reduce it? We don't have a full picture as to what their surplus is. But with Fitus, if they ever stop paying a supplemental dividend, we'll know there's a greater chance of a base dividend cut. It's not guaranteed. They can still make moves in their portfolio to potentially cover the base dividend if they want to, but I would be nervous for the base dividend in that situation. A second thing that's really good about Fidis is that they've done really well in preserving their net asset value. Especially right now, virtually all BDC's have seen their navs decline by a sizable amount. The NAV measures the underlying book value of a company's loan portfolio. A rising or stable NAV indicates that borrowers are successfully servicing their debt and that the BDC is just making good investments. A declining NAV points to underlying credit stress, defaults, or loan writedowns. When a BDC's NAV goes down, it's typically harder to grow it back up. So most BDC's that are good are usually flat or they see a small amount of growth in this metric. And also BDC's will typically trade around their NAV per share. So a growing NAV will typically mean a growing share price. We can see Fitus has done well at maintaining their NAV during this difficult operating environment. Even BDC's that have historically performed really well have seen larger than average declines in this metric recently. Vitus' NAV has gone down just a little bit, but not nearly as bad as average. There are several other good things about this company, including the high base dividend coverage and low nonacrruals I mentioned earlier. There are some negatives that go along with this stock, just like any other stock out there. Probably one of the biggest concerns is their high amount of software and tech exposure. If you believe in the SAS apocalypse in which you believe AI is going to bankrupt a large number of software companies, I would think twice about considering this BDC. If you watch my content regularly, you likely know at this point that I think this thread is overblown. Another downside is that Fidus is externally managed as opposed to internally managed. I discuss this pretty regularly with BDC's, but internally managed companies typically perform better than externally managed BDC's because they're better aligned with shareholder interest. With internally managed companies, board member compensation is mostly tied to portfolio and stock price performance. With externally managed companies like Fidus, they're mostly paid on portfolio size, and that's regardless of how well they perform. Internally managed BDC's also typically have higher insider ownership percentages. Now, there are good externally managed companies out there, such as Aries Capital and Sixth Street Specialty Lending, but internally managed BDC's have long been better performers, at least on average. But despite the concerns, I still think Fidus is a good stock. And I've known a lot of people who've been invested in this stock for a number of years. And now I'm finally jumping on board. Let me know your thoughts and if you like or dislike PhD Investment Corporation. If you want access to that BDC spreadsheet I showed earlier, which shows two dozen metrics for every publicly traded BDC, including metrics not reported on financial websites like Seeking Alpha, it's available on Patreon and was just updated for September. But with that being said, thanks for watching.