Oxford Lane Capital: 20% yield, beating the S&P 500 in 2024

Oxford Lane Capital (OXLC) is having a good year as it continues beating the S&P 500 index. Its stock has risen by 7.49% while the S&P 500 index has jumped by 18.13%. However, on a total return basis, which includes dividends, it has jumped by 21% while the index is up by 18%. 

In the long-term, however, OXLC has severely underperformed the market despite its high yield. For example, in the last five years, its stock has crashed by 46% while the S&P 500 index is up by 97.9%. Its total return has been 25% compared to the SPY ETF’s 113%.

Comparing any asset to the S&P 500 is a good way that investors do to see whether their cash would have done better by simply following the market. In the long-term, the index has been a better asset than most investing instruments, 

However, the best way to assess Oxford Lane Capital performance is to look at a similar financial asset like the Invesco Senior Loan ETF (BKLN). In the past five years, its total return stood at 22% while its YTD performance is 4%. 

A unique asset with high payouts

Oxford Lane Capital Corporation is a unique asset because of how it is structured. It is a closed-end fund (CEF) that exists in an industry that got a bad name after the Global Financial Crisis (GFC): Collateralized Loan Obligations (CLOs).

Its business strategy is to buy loans from banks, typically those classified as junk. It investors in debt and equity tranches of CLO vehicles, which may include warehouse facilities.

A CLO is often confused with a Collateralized Debt Obligations (CDO), which had a role in the last financial crisis. While the concept is the same, CDOs typically have a real estate exposure to them while a CLO has mostly credit exposure.

A big reason why investors have been afraid of investing in Oxford Lane Capital and similar funds is the fear that high interest rates would trigger a wave of defaults, especially among junk-rated assets.

The reality, however, is that default rates have been quite low in this high-interest rate environment. The situation will likely improve once rates starts coming down in September.

Oxford Lane recently hiked dividend

The only reason why investors allocate money into Oxford Lane Capital and similar funds is because of its income potential. Besides, the company has a whopping dividend yield of about 20%.

A 20% yield means that an investor with $10,000 in the fund can expect to receive gross amounts of about $2,000. The net amount, because of its high fee of about 12.45% is much less but stil higher than what other assets are offering. 

In its June presentation to investors, the company noted that the total fair value of its investments stood at over $1.713 billion, higher than the $1.24 billion it had in the same period in 2023. This growth happened as the number of portfolio investments rose to 249.

This performance helped the company boost its dividend payours by 12%, which is a good thing for investors. However, it is worth noting that cash flows from CLOs tend to be lumpy, meaning that its dividend payouts differ. Indeed, its dividend payouts have dropped from over 0.65 in 2014 to 0.08.

The other notable thing is that OXLC operates as a Regulated Investment Company (RIC), which means that it must distribute most of its taxable income to shareholders. If it fails to do that, then the company must pay excise tax, which it did in 2023 and paid a 4% duty of about $5.4 million.

Is OXLC a good investment?

At face value, Oxford Lane Capital looks like a good investment because of its strong dividend yield and as we move out from the high-interest rate environment. Besides, OXLC is doing better than the S&P 500 index this year. 

Still, the fund has risks, including its high CLO equity allocation, high leverage, and expense ratio. Therefore, if you are interested in generating regular income, it might make sense to invest in the fund, while factoring these risks.

In the long-term however, most investors will find it more attractive to invest in generic funds that track the broader market like the S&P 500 and Nasdaq 100 indices. These funds provide some income and growth and are the best way to bet on America.

For example, the S&P 500 index tracks companies like Microsoft, Berkshire Hathaway, Nvidia, JPMorgan Chase, and Apple. These companies dominate their respective industries and have a big chance of continuing growing. Most importantly, they have some of the balance sheets, with Berkshire Hathaway sitting on top of over $277 billion in cash.