Why I Just Bought This 10.9%-Yielding Fund and Plan to Buy Even More Shares

Some distributions are attractive. And some distributions are downright juicy. I think FS Credit Opportunities Corp.'s (NYSE: FSCO) distributions definitely belong in the latter category.

This closed-end fund (CEF) is managed by FS Investments. It focuses on global credit markets, especially senior secured loans and bonds. FS Credit Opportunities Corp.'s distribution yield is a mouthwatering 10.9% right now. Here's why I just bought shares of this ultra-high-yield fund and plan to buy even more.

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The right kind of high yield

You probably wouldn't believe me if I said the high distribution yield offered by FS Credit Opportunities Corp. wasn't a top reason why I bought the fund. And you'd be justified in such skepticism. The juicy yield certainly ranks as an important factor in why I invested in the closed-end fund.

More importantly, though, FS Credit Opportunities Corp. provides the right kind of high yield. What do I mean by that? Other CEFs come with even higher distribution yields, but if you examine their track records closely, you'll find that many of them pay the distributions by selling assets. At least part of the yield you might receive from these funds comes from your initial principal.

That's not the case with FS Credit Opportunities Corp., at least not since the current management team took over in 2018. Distributions have been fully funded through net investment income since the FS Global Credit Team assumed management of the fund.

The ultra-high yield for this CEF isn't because of a poor performance where a sinking share price drives the yield higher, either. FS Credit Opportunities Corp. has delivered an exceptional return over the last year. Management increased the monthly distribution rate by 7.5% at the beginning of 2025. Since the fund was listed on the New York Stock Exchange in November 2022, its distribution has increased by roughly 52%.

An attractive credit portfolio

I also like the underlying reason why FS Credit Opportunities Corp. can pay such a great distribution: its attractive credit portfolio. The fund has $2.1 billion in assets invested in 77 portfolio companies representing multiple sectors. Around 73% of these companies are privately held, with 93% of them based in the U.S.

FS Credit Opportunities focuses primarily on senior secured loans. Roughly 72% of its holdings are first lien senior secured loans, with 3% second lien. Another 9% of the portfolio is in senior secured bonds. I like senior secured debt because it's backed by borrowers' assets. Secured debt is also at the top of the list for repayment. This reduces the fund's risk of default.

The fund managers adjust their investment strategy to reflect changing market dynamics. For example, they're prioritizing private investments now because they typically have better asset coverage and are more insulated from volatility than public credit markets. FS Investments stated in its latest quarterly update, "We continue to defensively position the portfolio by adding what we believe are higher-quality investments that have low default risk with solid covenants given the competitive environment across credit markets." That's what I like to hear.

The CEF's emphasis on privately held middle-market companies is a good thing. FS Credit Opportunities can often structure investments with these businesses that give it greater protection against risks while still obtaining attractive returns.

Some risks

While I like this closed-end fund, I don't want to give the impression that investing in it doesn't come with risks. One key risk with FS Credit Opportunities is that it uses leverage (borrowing) to boost its performance. Leverage is a double-edged sword that can both help and hurt depending on interest rate swings.

The fund's focus on senior secured debt doesn't completely insulate it from the risk of defaults. For example, the value of the assets of borrowers used as collateral could drop. Even though FS Credit Opportunities could gain control of the collateral in a worst-case scenario, the CEF could still lose money on its investments.

FS Credit Opportunities has delivered an average annual return based on net asset value (NAV) of 7.75% since Jan. 1, 2018. However, there's no guarantee the fund will be able to deliver positive returns in the future.

But I like the overall risk-return profile offered by this CEF. Unless something changes dramatically, I plan to buy more shares in the not-too-distant future.

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Keith Speights has positions in FS Credit Opportunities. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.