SCD's 9.27% Yield: A Rewarding Opportunity or a Risky Gamble?

The LMP Capital and Income Fund (NYSE: SCD) has long been a magnet for income-seeking investors, but its recent yield bump to 9.27% has sparked heated debate. While the figure is undeniably enticing, the devil lies in the details of how this yield is generated—and whether it can be sustained. Let's dissect the mechanics, risks, and opportunities behind SCD's high payout.

The Anatomy of SCD's 9.27% Yield

The fund's managed distribution policy guarantees a fixed monthly payout of $0.12 per share, which annualizes to its current 9.27% yield (based on a recent share price of $15.53). However, the composition of these distributions raises critical questions.

• Source Breakdown: Over the past year, 97.11% of distributions have been sourced from long-term capital gains, while just 2.89% came from net investment income. Crucially, no return of capital was reported in the latest filings—unlike prior periods where it accounted for nearly a tenth of payouts. This shift suggests the fund is relying more on capital gains to sustain its yield.
• Expense Overhang: SCD's 2.70% expense ratio is significantly higher than the average closed-end fund (CEF), eating into returns. Combined with 18.7% leverage, this amplifies volatility and reduces the margin for error in its investment strategy.

The Risks: Return of Capital, Leverage, and Liquidity

While SCD's yield is compelling, its structure introduces three major risks:

1. Return of Capital Dependency: Though the latest distribution avoided return of capital, historical data shows it has been a recurring feature. A return of capital reduces shareholders' tax basis but does not reflect true income. Over time, this erodes capital and poses a sustainability challenge.
2. Leverage Amplification: The fund's use of borrowing boosts returns in rising markets but magnifies losses in downturns. With 18.7% leverage, SCD's NAV is more volatile than unleveraged peers, as seen in its -9.9% NAV drop from late 2024 to mid-2025.
3. Discount to NAV: SCD trades at a 5.55% discount to its NAV, implying investors demand compensation for perceived risks. Should market sentiment sour, this discount could widen, compounding losses for shareholders.

The Rights Offering: A Double-Edged Sword

In June 2025, SCD announced a 1-for-3 rights offering to raise capital and potentially lower its expense ratio. While this could improve liquidity and reduce leverage, there are caveats:

• Dilution Risk: New shares will dilute existing shareholders' stake and exclude them from the July distribution, reducing immediate income for participants.
• Market Conditions: The offering's success hinges on investor confidence. If the fund's NAV continues to underperform, the subscription price (tied to 90% of NAV) could limit upside for new investors.

The Investment Thesis: Proceed with Caution

SCD's 9.27% yield is undeniably attractive in a low-yield environment, but it is not without trade-offs. Here's how to approach it:

• Income Seekers: Consider a small allocation if you can stomach volatility and understand the risks of return of capital. Monitor the fund's distribution sources closely—shifting back to return of capital would signal distress.
• Avoid if: You prioritize capital preservation, dislike leverage, or cannot tolerate a discount to NAV. SCD's structure makes it a “all-in” bet on its management's ability to navigate volatile markets.

Final Verdict

SCD's 9.27% yield is a siren song for income investors, but the fund's reliance on capital gains, high expenses, and leverage creates a precarious balancing act. The recent avoidance of return of capital is a positive sign, but history suggests this may not last indefinitely. For those willing to take on the risks, SCD could deliver outsized income—but only if the fund's performance improves and its NAV stabilizes. Proceed with caution, and keep a close watch on its distribution policy and leverage levels.

Bottom Line: SCD is a high-risk, high-reward play. Its yield is compelling, but investors must weigh the allure of income against the potential erosion of capital and the ever-present risks of leverage.

Data as of July 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.