Kohlberg Capital Corp (KCAP) Yields 13% Dividends, but Beware the Risks

For those dividend investors who have an appetite for risk and have not been put off the financial services sector by the global financial crisis, one stock to consider is Kohlberg Capital Corporation (KCAP).

The company, which provides asset management and structuring of financial loans, is currently offering investors a yield of 13%. KCAP's (KCAP) asset management business Katonah Debt Advisors has around $2 billion in assets under management and the firm shares a strategic relationship with private equity firm Kohlberg & Co which has about $3.5 billion in committed capital.

Kohlberg Capital (KCAP) provides debt financing to businesses which are earning between $7.5 million and $50 million per year, a market which they estimate is valued at around $200 billion per annum. Reporting second quarter results at the start of August, the company turned in a solid performance with net investment income for the six months ended June 30 at $2.9m, or $0.13 per share. Dividends were held at $0.17c for the first and second quarters. Net asset value per share of $9.20 for the second quarter was down from the $9.56 but still well above the $5.02 where the company is currently trading.

At the end of June, Kohlberg Capital (KCAP) had unrestricted cash and time deposits of approximately $12.8 million. Through the first half of 2010, the investment portfolio continued to perform well and the company’s investments have benefited from the general recovery in values of corporate debt as a result of improved economic conditions.

The risks associated with the company are fairly obvious, and the dividend yield at such a high percentage should concern the conservative investor. Apart from the risk associated with investing in a financial services business of this nature, KCAP (KCAP) also has legal claims against lending providers who they allege terminated their credit facility improperly.

The stock is trading so far below its net asset value and on such a high dividend yield for good reason: The company warned investors it could be forced to pay the remaining balance of the Facility (approximately $144 million as of July 31, 2010), which would adversely affect the Company's business, liquidity, financial condition and results of operations.

Investing in KCAP (KCAP) is a classic tradeoff between risk and reward. Investors have enjoyed a phenomenal dividend yield in recent history and there are few other investments which will yield this kind of returns, but with this kind of reward there is also associated risk that of which investors must be very cautious.