This 18% Yielder May Be Great For Income, But Comes With Massive Risks

Income Investors Beware

Mar 25, 2026

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Current Price: $10.04

Dividend/Yield: $0.45/17.9%

Buying beaten-down stocks when they’re out of favor can sometimes lead to outsized returns. Some of the best investments are made when sentiment is at its worst and expectations are low.

That said… not every beaten-down stock is a hidden gem.

Some are simply deteriorating businesses.

For income-focused investors, FSK KKR Capital Corp (FSK) may look incredibly attractive at first glance. The stock currently offers a yield near 18% and trades at a steep discount to net asset value (NAV). At roughly $10 per share, many investors may be wondering if the worst is already priced in.

And it’s a fair question.

But as Peter Lynch famously said: “A stock could go to zero”

I’m not suggesting that FSK is going to zero — I believe that scenario is unlikely. However, I do believe the company is likely to continue underperforming due to ongoing fundamental deterioration.

In this article, I’ll walk through FSK’s latest earnings, its financial position, and why — despite the high yield and discount — I remain cautious.

The Early Warning Signs ‼️

In November 2025, the company reported Q3 earnings and introduced a new dividend policy targeting a 10% yield.

At the time, this may have sounded like a positive adjustment.

But in reality, it was a reset lower.

Management essentially reduced the dividend while framing it in a way that softened the impact. At that time I thought investors should remain cautious, as I expected further dividend pressure across the BDC sector amid rising economic uncertainty.

To be fair, there were a few positives in Q3:

Non-accruals declined slightly quarter-over-quarter
NAV increased modestly by $0.06 to $21.99

However, those improvements proved short-lived.

Since then, the stock has declined roughly 35%, significantly underperforming the broader market, which has been relatively flat over the same period.

A Chronic Underperformer 📈

While many BDCs have faced headwinds over the past year, FSK’s performance stands out — and not in a good way.

Down more than 50% over the past year
Down roughly 32% year-to-date

This level of underperformance goes far beyond typical sector volatility.

Yes, the BDC sector (BIZD) has been impacted by:

Falling interest rates
Increasing recession risks
Weakness in certain sectors like software

However, FSK’s decline appears to be driven by something more structural.

AKA - credit quality concerns.

It’s Not Just Macro — It’s the Fundamentals 🧱

One of the most concerning aspects of FSK is the continued deterioration in its financial performance during Q4 released in February.

Net investment income (NII) continues to trend lower:

$0.66 → $0.52 year-over-year
Down from $0.57 in the prior quarter

While dividend coverage currently sits at around 108%, this is far from comfortable. There is very little margin for error.

Declining Total Performance ↘️

What’s more concerning is that the decline isn’t just on a per-share basis — it’s happening across the entire business.

Total investment income fell 14% ($407M → $348M)
Adjusted NII declined from $185M → $147M
Portfolio value dropped from $13.5B → ~$13B

Even as borrower count increased from 214 to 232, overall performance weakened.

That’s a major red flag.

For comparison, peers like Trinity Capital (TRIN) saw per-share declines but total income growth, suggesting underlying business strength. FSK is showing the opposite.

NAV Decline: The Biggest Red Flag 🚨

When analyzing BDCs, one of the most important metrics I focus on is NAV.

Why? Because NAV reflects the true value of the underlying portfolio.

And in FSK’s case, it’s moving in the wrong direction.

Q3 NAV: $21.99
Q4 NAV: $20.89
Down 11.63% over the past year

This decline was driven by:

$0.87 in markdowns on borrowers
Dividend payouts exceeding earnings

While some NAV fluctuation is normal, consistent and meaningful declines are not.

In contrast:

Ares Capital (ARCC) has maintained relatively stable NAV
Capital Southwest (CSWC) has shown NAV recovery

FSK’s trend stands out — and not in a positive way.

Rising Non-Accruals Signal Trouble 🔥

If NAV tells the story… non-accruals confirm it.

FSK’s non-accruals now stand at:

5.5% (cost basis)
3.4% (fair value)

That’s well above the industry average of ~3.8%. Personally, I prefer BDCs with non-accruals below 2%. Once they move above 2.5%, it starts to raise concerns.

What’s even more troubling is the trend:

5 new non-accruals added in Q4
Only 1 removed

That’s not stabilization — that’s deterioration.

Management even acknowledged: “…higher than we would like…”

Dividend Risk Is Still Very Real 💵

While the dividend is currently covered, the outlook is becoming less certain.

Management has already adjusted expectations:

Initial target: ~10% yield
Revised: ~9% of NAV

That’s a clear signal.

And if conditions worsen:

Falling rates
Rising defaults
Economic slowdown

Another dividend cut is very possible within the next 6–12 months.

Balance Sheet: A Relative Strength ⚖️

To give credit where it’s due, FSK’s balance sheet is not the primary concern.

$3.8B in liquidity
No major debt maturities until 2027
Debt-to-equity ratio: 1.22x (reasonable)

However, liquidity alone doesn’t offset poor credit performance.

Risk vs. Reward 📝

The Bull Case:

High income (18% yield)
Deep discount (0.48x NAV)
Potential rebound if credit stabilizes

The Bear Case:

Declining NAV
Rising non-accruals
Weak earnings trend
Dividend cut risk

The Risks: High Yield ≠ Safe Income ⚠️

This is a classic example of why investors need to look beyond yield.

FSK may appear attractive on the surface…

But underneath, the business is facing real challenges.

👉 Credit quality is deteriorating

👉 Earnings are declining

👉 NAV is trending lower

What Would Change My View? 🧐

I’m not ruling FSK out long-term.

However, I would need to see:

A meaningful decline in non-accruals
Stabilization (or growth) in NAV
Improvement in earnings trends

If those conditions are met, and the yield and discount remain attractive, I would consider revisiting my rating.

Bottom Line ✅

FSK KKR Capital has significantly underperformed its peers, and for good reason.

While the ~18% yield and steep discount may look appealing, the underlying fundamentals suggest caution is warranted.

At this point, the downside risks — particularly the potential for further dividend cuts and continued credit deterioration — outweigh the upside potential.

For now, I maintain a Hold rating.

What do you think of FSK KKR Capital? Would you hold long term or do you think it is just an quick income play? Let me know in the comments.

Happy Investing!

☎️ If you’re looking to create passive income and build your wealth from one of the top-rated analysts, book a call (Let’s Talk Investing or Detailed Portfolio Review) with me to get started.