Oxford Square Capital's (OXSQ) Unsustainable Dividend and Its Implications for Investors

Business development companies (BDCs) are often marketed as income vehicles, promising steady dividends to investors. However, the financial health of these firms-and the sustainability of their payouts-depends heavily on their ability to generate consistent net investment income (NII) and manage balance sheet risks. Oxford Square Capital (OXSQ), a BDC focused on leveraged loans and collateralized loan obligations (CLOs), has recently raised red flags for investors. According to a StockTitan report, the firm's dividend payout ratio appears to exceed 150% of its net investment income, signaling a reliance on external financing or retained earnings to fund distributions. This imbalance, coupled with a declining net asset value (NAV) and a problematic non-accrual asset, underscores the fragility of its dividend strategy and the risks for shareholders.

The Payout Ratio: A Recipe for Instability

OXSQ's declared monthly dividend of $0.035 per share for January–March 2026 translates to a quarterly payout of $0.105 per share. With net investment income of just $0.07 per share in Q3 2025, the implied payout ratio of 150% suggests the company is distributing more in dividends than it generates in earnings, according to the StockTitan report. This is a critical warning sign for BDCs, which are typically expected to maintain payout ratios below 100% to ensure they can cover distributions without diluting shareholders or relying on costly capital raises.

The situation is exacerbated by OXSQ's declining NAV, which fell from $2.06 to $1.95 per share in Q3 2025 due to a $7.5 million net unrealized depreciation, according to the StockTitan report. A shrinking NAV reduces the cushion of retained earnings available to fund dividends, forcing the company to either cut distributions or issue shares at a discount-both of which dilute existing shareholders.

Balance Sheet Risks: Liquidity and Non-Accrual Assets

OXSQ's balance sheet reveals further vulnerabilities. The firm has turned to its at-the-market (ATM) program to raise $11.8 million by issuing 5.4 million shares, increasing the total shares outstanding to 81.7 million, according to the StockTitan report. While this provides short-term liquidity, it also signals a lack of organic growth in NII. Meanwhile, a $4.9 million preferred equity position in its portfolio is currently on non-accrual, meaning it is not generating income and may require write-downs or restructuring, according to the StockTitan report. Such assets can erode capital and create downward pressure on NAV, further straining the dividend.

The recent authorization of a $25 million share repurchase program, while seemingly positive, introduces another layer of complexity. If executed, the buyback could reduce shares outstanding and boost earnings per share, but it also consumes liquidity at a time when OXSQ may need to preserve cash to cover its dividend, according to the StockTitan report. This duality-raising capital via ATM while authorizing repurchases-highlights the company's precarious capital management strategy.

Implications for Investors

For income-focused investors, OXSQ's current trajectory raises significant concerns. A dividend cut is not only likely but necessary to align payouts with NII, according to the StockTitan report. However, any reduction would likely disappoint shareholders who rely on the stock for regular income. Additionally, the firm's reliance on external financing increases the risk of share price volatility, particularly if market conditions deteriorate or borrowing costs rise.

Investors should also monitor the resolution of the $4.9 million non-accrual asset. If this position requires a write-down or generates further unrealized losses, OXSQ's NAV could decline further, compounding the pressure on its dividend, according to the StockTitan report. The firm's quarterly NAV disclosures and updates on capital management actions will be critical indicators of its ability to stabilize its financial position.

Conclusion

Oxford Square Capital's unsustainable dividend and balance sheet challenges exemplify the risks inherent in BDC investing. While the sector's high yields are attractive, they often mask underlying vulnerabilities, such as overleveraged portfolios and payout ratios that exceed earnings. For OXSQ, the path forward requires a recalibration of its dividend policy, a resolution of its non-accrual asset, and a disciplined approach to capital raising. Until then, investors would be wise to treat the stock with caution and prioritize transparency in the firm's quarterly reporting.