The last five weeks have served as a stern reminder that even though the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) have steadily climbed over multidecade timelines, getting from Point A to B is filled with twists and turns.
The good news for opportunistic long-term investors is that Wall Street “hiccups” lead to price dislocations. Late last week, one price dislocation became too enticing, leading me to double my position in a monthly dividend stock that’s yielding 16%! Investors, say hello to PennantPark Floating Rate Capital (NYSE: PFLT).
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PennantPark Floating Rate Capital is a business development company (BDC), which is a fancy way of saying that it invests in generally unproven businesses (commonly known as “middle-market companies”). While there are risks that come with investing in middle-market companies, PennantPark’s management team has done a phenomenal job of covering its proverbial bases.
BDCs fall into one of two camps: equity- or debt-focused. Although it closed out December with $275 million in various preferred and common stock positions, PennantPark’s $2.33 billion in debt securities make it a predominantly debt-focused BDC.
Why debt? The simple answer is yield. Many of the middle-market companies PennantPark has financed have limited access to traditional loans and lines of credit. With few financing options available to these smaller businesses, PennantPark is able to net an above-average yield on the loans it makes. It ended 2025 with a weighted-average yield on debt investments of 9.9% — more than double the yield of long-term U.S. Treasury bonds.
What makes PennantPark Floating Rate Capital such an intriguing investment can be found in its name: “floating rate.” Approximately 99% of its $2.33 billion loan portfolio sports variable interest rates. Although the Federal Reserve’s rate-easing cycle has weighed on PennantPark’s weighted-average yield on debt securities, the oil price shock in the wake of the Iran war may result in the central bank completely shifting its monetary policy. If this is the case, PennantPark’s loan portfolio is ideally positioned for success.
Management also deserves credit for protecting the company’s invested principal. Only 0.5% of the company’s portfolio at cost was on non-accrual (i.e., delinquent on payments) as of Dec. 31, 2025. Furthermore, PennantPark has spread its $2.61 billion investment portfolio across 160 companies (including its common and preferred stock positions), ensuring that no single investment is imperative to profitability or capable of sinking the ship.
