Prospect Capital Yields 28%. Is This Dividend Too Good to Be True?
Three BDCs are flashing yields as high as 28%, but each one carries a hidden fault line that could wipe out income and principal in the same move. Before you chase the payout, find out what the earnings numbers actually…
Shares of Prospect Capital (NASDAQ:PSEC) have fallen 33.11% this year to $1.50. That drop has pushed the forward distribution yield to roughly 28%. For a retiree living on monthly checks, that number looks like a windfall. A high yield is only as good as the company’s ability to keep paying it, and several of the market’s biggest payouts are flashing warning signs.
The test is simple: a dividend becomes unsustainable when the earnings base behind it (net investment income for business development companies, or BDCs, and cash flow for most other companies) falls short of the payout, when debt or asset sales cover the gap, or when the yield is high mainly because the stock collapsed.
Prospect Capital (PSEC) Faces Shrinking NAV and a Looming Bond Maturity
Prospect Capital pays a monthly distribution of $0.035 per share. The next ex-dividend date is October 28, 2026, with payment on November 18. At the current price, the $0.42 annualized payout works out to about 28%.
That yield comes from a falling stock price. Shares dropped 30.06% in the past month and 64.9% over five years. The payout has already been cut more than once: from $0.06 through October 2024, to $0.045, and then to $0.035 starting in May 2026. For a BDC, the right coverage metric is net investment income (NII) measured against the share count, and Prospect’s has fallen from $0.19 to $0.16 to $0.15 over three straight quarters.
Three monthly payments total $0.105 per quarter, so NII still covers the reduced payout on paper. The company itself lists “distributions to common shareholders exceed net investment income” as a risk and says distributions may include return of capital. Net asset value (NAV) per share fell to $5.71 from $6.56 a year earlier. Net realized losses were $223.7 million for fiscal 2026, and a $264.5 million institutional bond matures in November 2026.
To keep the payout going, Prospect needs the Valley Electric sale to deliver. That deal closed with about $281 million in expected net proceeds, which would help cover the maturity. Its shift into first-lien loans, now 72.5% of the portfolio at cost, also needs to stop the NAV erosion. Net debt sits at a modest 28.6% of the asset base. The August call did not explain the latest distribution reduction, which leaves readers of PSEC’s earlier dividend cut with the same open question.
FS KKR Capital (FSK) Leans on a Fee Waiver That Expires Soon
FS KKR Capital (NYSE:FSK | FSK Price Prediction) trades at $10.13, and its $1.76 annualized forward payout implies a yield of about 17.4%. The board has declared a $0.44 regular distribution with a December 16 ex-date, plus an extra $0.20 payment going ex on December 1.
This payout is already shrinking. FSK paid $0.70 per share per quarter through December 2025, then $0.48, $0.42, and $0.44. Second-quarter NII of $0.44 per share matched the distribution exactly, and that figure was propped up by a 50% incentive fee waiver from KKR that runs only four quarters. Coverage looks thin once the waiver ends.
Non-accruals stand at 7.1% of the portfolio at amortized cost, and NAV fell to $18.30 from $20.89 at year-end. The stock is down 22.56% this year and trades at roughly 55% of NAV. The company says it may fund distributions from sources other than NII, and securities class actions claim it overstated dividend durability.
Debt-to-equity dropped to 127% from 138%, and KKR added a $150 million preferred investment alongside a $300 million buyback. We covered FSK’s earlier dividend cut revision.
Ares Capital (ARCC) Earnings Now Trail Its Dividend
Ares Capital (NASDAQ:ARCC), the largest publicly traded BDC, pays $0.48 a quarter for a yield near 10.4%. Its yield comes from little to no share-price weakness: shares are down just 1.23% this year and up 4.35% over 12 months.
Coverage, though, has fallen. Core EPS came in at $0.47 in both of the first two quarters of 2026, below the $0.48 dividend, after $0.50 in each of the two quarters before. Non-accruals rose to 2.4% from 1.8% at year-end, NAV fell to $19.35 from $20.01, and leverage climbed to 1.15x from 1.09x. Holding a flat payout while earnings run below it is a yellow flag.
The shortfall is just one cent, and Ares has about $6.0 billion of liquidity, no meaningful near-term maturities, and 17 years of stable or increasing regular dividends. Among these three, it has the most room for error, and our look at Ares Capital’s stalled $0.48 dividend tracks that tension.
Yield Alone Is Never a Buy Thesis
When a dividend gets cut, the share price usually falls with it so that investors can lose income and principal in the same move. Before you rely on a double-digit yield, check NII coverage, NAV trends, and why the stock fell (we outlined key signs a big yield is about to be cut in a free report, here). Treat yield as the place your research starts.
Contact [email protected] for any questions or corrections.
Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
