Update on Fifth Street Finance, Top Dividend-Paying Financial Stock

By Ben Warwick

Commentary October 30, 2011 at 06:56 AM

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Fifth Street Finance (FSC), a lender to mid-sized companies and private equity firms, has been in the news several times in the last week.

First off, a nod from Forbes magazine, which touts it as a Top 10 dividend-paying financial stock, according to Dividend Channel. he article mentioned that FSC is trading below book value and has a very attractive annual yield.

Wells Fargo's latest research report is less favorable. The firm lowered its rating on FSC to "market perform" from "outperform," citing a strong possibility that the dividend may be cut be a few cents a share due to less-than-expected growth of its loan portfolio.

Our view is that FSC, like other business development companies (BDCs), suffered this summer due to risks of a double-dip recession. After the events of the last few days, those fears have been largely assuaged, at least in the short-term. As the stock recovers, we may trim positions, but not until we see a few more dollars of upside. In the interim, we still like clipping the coupon.

Disclosure: Author owns FSC