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FS KKR Corp Is a BDC That Yields 13.7% and Offers Good Covered Call Income
FS KKR Corp (FSK) is a business development company that invests in middle-market companies' debt securities. As a BDC it passes on 90% of the income that it earns to shareholders in the form of quarterly dividends.
Last quarter FSK paid out a quarterly dividend of 68 cents. That works out to $2.72 annually if the dividend is kept at that level. That gives it an annualized 13.73% dividend yield at today's price of $19.80 as of June 30. FSK tends to vary its dividends each quarter based on the amount of income it has produced. In the past three quarters that has led to higher income and higher dividends paid out.
However, investors can assume that with a recession on the horizon there will be some degradation in the secured lending portfolio income at FSK. That could lead to a potential drop in the dividend.
Let's look at that. For a long period, it paid out a dividend of just 60 cents per quarter. That works out to $2.40 annually and at today's price, it provides a dividend yield of 12.1%. Nevertheless, this is still a very nice high yield, even if the dividend is cut to 60 cents.
Moreover, on top of that FSK has a net asset value (NAV) of $27.33. That means that at $19.80, the stock trades at just 72.4% of its NAV. It also implies that if the company were to be liquidated at the NAV, investors would make a return on capital of 40.6%.
We can also use that to help us look at covered calls with FSK.
Covered Call Income with FSK
To earn extra income an investor can sell covered calls by buying 100 shares of FSK and then selling out-of-the-money call options. For example, the Oct. 21 call options at $22.50 trade for 25 cents at the midpoint. You can see this in the Barchart option chain below.
This shows that if you spend $1,980 on call options, the investor can then sell 1 call option at the $22.50 strike price and receive $25. Buying 500 shares for $9,900 will allow the investor to receive $125. That works out to a return of 1.26% if the options are held until the expiration date and are not assigned and exercised (i.e., if the stock reaches $22.50 or higher).
If this is done over the period of one year (i.e., 3.259 times), the annualized return is 4.1%. That provides extra income on top of the 13.73% dividend yield that the investor receives holding FSK stock. Of course, it also assumes that the stock does not rise to $22.50. But even if it does, the investor makes an additional 13.64% (i.e., $22.50/19.80-1).
That makes this one of the best BDC plays to earn a high dividend yield and covered call income right now.
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