FS KKR Capital Corp. (NYSE: FSK) is a business development company (BDC) that’s a partnership between FS Investments and KKR Credit. KKR Credit is part of the legendary private equity firm KKR & Co. Inc. (formerly Kohlberg Kravis Roberts & Co.).

BDCs typically lend money to other businesses. FS KKR has 190 companies in its portfolio with an average annual yield of 8.1%. However, 3.7% of its loans are late.

The company recently declared a $0.62 per share dividend, which comes out to an 11.6% annual yield. Can investors expect to continue to receive a strong double-digit yield in the year ahead?

When we analyze BDCs, we look at net investment income (NII). This is how much money the company makes from lending out capital to other businesses, plus any capital gains or losses on those loans.

NII spiked from $0.82 per share in 2018 to more than $3 in 2019. It slipped to $2.66 per share last year, and I estimate it will be nearly flat at $2.68 this year.

In 2021, FS KKR paid $1.99 per share in dividends for a payout ratio of 75%. This year, it will pay out $2.47, or 92% of NII, which is starting to get close to my limit. I’m okay with BDCs paying out 100% of their NII back to shareholders, but preferably, I’d like there to be a little bit of a buffer in case NII declines. That way, the company won’t have to cut its dividend.

The company cut its payment in 2018. Last year, it raised the quarterly dividend significantly from $0.19 per share to $0.60. The company then raised it to $0.65 in the third quarter of 2021. For the fourth quarter, it lowered the dividend to $0.62.

FS KKR is a strong performer, but its dividend policy is variable, so it may frequently lower or raise its dividend based on the company’s financial performance. As a result, investors should expect fluctuations in the dividend from time to time.

Over the next 12 months, there is a moderate chance of a dividend cut, though I wouldn’t expect it to be drastic.

Dividend Safety Rating: C