Updated on February 27th, 2023 by Samuel Smith
Business Development Companies – or BDCs, for short – can be a great source of current yield for income investors.
Main Street Capital Corporation (MAIN) is a great example of this. This BDC has a current dividend yield of 6.6%. Better yet, Main Street Capital Corporation pays monthly dividends.
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
The stock’s high dividend yield and monthly payments make it a solid choice for income investors. But what about the strength of the underlying business?
Fortunately for investors, Main Street Capital’s business appears to be performing well. This article will discuss the investment prospects of Main Street Capital Corporation in detail.
Main Street Capital Corporation is a Business Development Company, or BDC. You can see our full BDC list here.
The company operates as a debt and equity investor for lower middle market companies (those with $10-$150 million of annual revenues) seeking to transform their capital structures. The BDC has the capability to invest in both debt and equity, which gives it a significant advantage over companies who invest in private debt or private equity alone.
Main Street Capital Corporation also invests in the private debt of middle-market companies (not lower middle-market companies) and has a budding asset management advisory business.
Source: Investor Presentation
The BDC’s corporate structure is rather simple. Main Street Capital Corporation operates three funds:
- The Main Street Mezzanine Fund
- The Main Street Capital II Fund
- The Main Street Capital III Fund
Since Main Street Capital Corporation is the operator of its own investment funds, management fees are kept to a minimum, which gives it a cost-based competitive advantage over its competitors who outsource their fund management.
Main Street Capital Corporation’s holdings are highly diversified by both transaction type and geography. By transaction type, the BDC acquires most of its deals via recapitalization and leveraged buyouts. Main Street Capital Corporation also has a very high degree of diversification by industry.
Main Street Capital Corporation’s growth prospects come from its unique strategy of driving investment returns. Investors who own the stock are rewarded as the BDC sustains its high monthly dividend and grows it over time.
At the business level, Main Street Capital Corporation’s growth will be driven by its expertise in the lower middle market segment of the economy.
On February 23rd, Main Street Capital released fourth-quarter and full-year results for 2022. In Q4, the distributable net investment income was $1.03 per share, which exceeded the consensus of $0.88 and rose from $0.88 in Q3 and $0.78 in the same quarter of the previous year. The total investment income of $113.88M also surpassed the consensus of $107.31M, increasing from $98.4M in the previous quarter and $82.17M in Q4 2021. Interest income increased to $86.30M from $75.02M in Q3 and $53.79M in the previous year.
The net asset value was $26.86 per share, an increase from $25.94 in Q3 and $25.29 at the end of 2021. The net increase in net assets resulting from operations was $106.32M, which was higher than $55.34M in Q3 and $94.35M in Q4 2021.
The BDC incurred total cash expenses of $33.87M, which increased from $32.6M in Q3 and $27.55M in Q4 2021. During the quarter, the BDC made $86.4M in total private loan portfolio investments. However, after repayments, sales of debt investments, and return of invested equity capital from several private loan investments, there was a net decrease of $26.1M in total private loan portfolio investments.
To conclude, Main Street Capital Corporation has expertise in the lower middle market of its industry and has a budding asset management business that enables it to have strong operational leverage. These factors will drive the BDC’s growth for the foreseeable future.
Source: Investor Presentation
As mentioned above, the company pays a monthly dividend. The company has been paying a monthly dividend since the end of 2008. Since that time, the dividend has been rising and we expect the company to continue to grow its dividend for the foreseeable future.
Throughout the years, the company has also paid substantial supplemental dividends. These are one-off special dividends. We also expect the company to continue this tradition of special dividends.
The dividend safety looks pretty strong at the moment. For example, based on earnings, the company easily covered its dividend over the past two years and its regular dividend growth alongside occasional special dividends also imply that its dividend is in good shape.
In order to avoid corporate income tax as a BDC, Main Street must distribute at least 90% of its taxable income, leaving little wiggle room to fund growth. While this strategy has worked extremely well since the last recession, we do caution that this method of funding becomes substantially less attractive (and more expensive) in weaker economic periods.
The main threat to the dividend is if the economy goes into recession, forcing many borrowers to default and interest rates on its floating rate loans to plummet. As a result, earnings per share would likely decline rapidly, forcing the company to right-size its dividend. For now, however, the dividend appears to be safe.
Although Main Street Capital Corporation is off-the-radar for most dividend growth investors, this BDC has a strong history of delivering substantial shareholder returns.
The firm’s strong track record of superior investment management and expertise in the lower middle market segment gives it a strong competitive advantage in the private equity and debt industry.
Further, Main Street Capital Corporation is shareholder-friendly with a high yield and monthly payouts. The stock’s high yield and monthly dividend payments look attractive for income investors, though the large premium to NAV and moderating growth outlook could limit total return potential.
Further Reading: 20 Highest-Yielding BDCs
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more