Discount Doublecheck

We all love a discount.  When we watch State Farm commercials or Progssive commercials, they are always talking about their discounts. I would not be surprised to hear that someone would rather buy an item priced at $100 and told they are getting a five percent discount as opposed to another store that always has it at $100.

When we buy stocks, we also love to get a discount. The problem being ( of course) that it can be difficult to ascertain whether we are getting a discount... Usually.  But what if I were to tell you that one of my stocks comes with a guaranteed built-in discount? Ok, ok, I know I have spoken many times about the discounts imbedded in Closed End Funds. This time I am talking about something different.

One of my higher yielding holdings is FSC, a firm that specializes in lending to businesses that may have trouble borrowing money from a traditional bank (no, I do not think they are loan sharks).  They pay a monthly dividend of 9.58 cents per share, which works out to a 10.8% yield. But even better is that if you opt to reinvest your dividends in additional stock, you get that stock at a five percent (wait for it) discount!!! How sweet is that? So if you made a simplifying assumption that the share price never changed, and all you get is the dividend, after two years (assuming you started with 100 shares), you would have 125.46 shares.  That is a compounded annual growth rate of just over twelve percent (note, part of increase from the 10.8% yield is due to the five percent discount and the rest is due to the fact that it is really a 0.9021% monthly yield, which compunds annually to more than 10.8%). In actuality it compounds to 11.4%.  Just another benefit of reinvesting dividends and getting paid monthly!  Love the math, love the compounding, love the slow but steady wealth it can build!