MAIN Stock: 1 Top Monthly Dividend Stock for 2017
This Monthly Dividend Stock Is Now Yielding 6.17%
When most companies in today’s stock market yield next to nothing, a 6.17% dividend yield with payouts that are steadily increasing sounds too good to be true. But there’s more; the company with such an impressive yield is paying out dividends on a monthly basis.
Most dividend stocks distribute a part of their profits on a quarterly basis. That’s why if you are relying on your portfolio to generate a steady stream of income, monthly dividend stocks are certainly worth taking a look at. I mean, your bills need to be paid every month, so why wait a quarter to collect your dividends?
Monthly dividend stocks are often found among real estate investment trusts (REITs). But today, I want to talk to you about Main Street Capital Corporation (NYSE:MAIN), which is not a REIT, but a business development company, or BDC. Business development companies might not be as popular as REITs, but they do share a similarity. Just like REITs, BDCs are required by law to distribute at least 90% of their earnings to investors. That’s why many BDCs are offering much bigger payouts to dividend investors.
Collecting Monthly Dividends from This Business Development Company
Main Street Capital is a BDC located in North America that invests in lower-middle-market companies with revenues of between $10.0 million and $150.0 million and earnings before interest, taxes, depreciation, and amortization (EBTIDA) of between $3.0 million and $20.0 million. It targets companies operating in the fields of consumer discretionary, energy, financials, health care, industrials, materials, telecommunications, and transportation. The fund provides debt, equity, and warrant financing to those companies.
And if you are worried that a BDC might invest too much in one company, don’t; BDCs are legally required to not invest more than five percent of their assets in any one security.
Sounds like a good candidate for a dividend portfolio? That’s because it is. This particular business development company has been on the market for less than 10 years, but has already shown the ability to grow its payout.
Main Street Capital came to the market in 2007 with quarterly dividends. In September of 2008, the company started paying dividends on a monthly basis. Since its initial public offering (IPO), the company’s monthly dividend rate has increased by 68.2%. (Source: “Dividends,” Main Street Capital Corp, last accessed November 11, 2016.)
Note that Main Street Capital didn’t really start in the best times of the stock market. The Great Recession, officially lasting from December 2007 to June 2009, was considered by many to be the biggest economic downturn since the Great Depression. Many companies saw their earnings deteriorate, and some shut down their operations altogether.
As a company that provides debt and equity financing to other companies, you might think Main Street Capital would be severely impacted by the downturn. But that wasn’t the case; this BDC did not trim its payout by a single penny during that period.
Most recently, things have been going quite well at the business development company. In the third quarter of 2016, the BDC earned $30.6 million in net investment income, representing a 10% increase year-over-year. Distributable net investment income was $32.7 million, representing an 11% increase from the year-ago period. Note that the company’s distributable net investment income per share exceeded its dividend payout by approximately 15%, leaving a margin for error. (Source: “Main Street Announces Third Quarter 2016 Financial Results,” Main Street Capital Corporation, November 3, 2016.)
Now the concern for all investors in the stock market and the bond market is the potential tightening of monetary policy by the U.S. Federal Reserve. While higher interest rates often cool down the stock market, note that because of the large amount of floating rate loans made by Main Street Capital, the company can actually gain from a rise in interest rates.
But of course, no company is perfect. As a business development company, Main Street Capital has to distribute 90% of its earnings, which prevents the company from accumulating capital through retained earnings. And because the company provides debt financing, it also has to face the credit risk of the borrowers. That’s one of the reasons why despite being a monthly dividend stock with a solid track record of distribution growth, MAIN stock is trading at just 18.78 times its earnings.
Still, for dividend investors that want to add a monthly dividend stock to their portfolio, Main Street Capital is certainly worth taking a look at.