A Top Monthly Dividend Stock for Income Investors
Today’s chart highlights a monthly dividend stock that’s currently offering an attractive annual yield of 7.1%.
The company in question is Main Street Capital Corporation (NYSE:MAIN), a business development company (BDC) headquartered in Houston, Texas. Main Street provides capital to lower middle-market companies in the United States. It earns a regular income from its debt investments and also makes money from capital appreciation, dividends, and realized gains from its equity investments.
Now, I know what you are thinking. A high dividend yield can be a sign of trouble. Since a company’s dividend yield moves inversely to its share price, a high yield could simply be the byproduct of terrible stock price performance.
But that’s not really the case for this monthly dividend stock. As a matter of fact, the performance of Main Street Capital has been more than solid.
The chart below shows the company’s total return performance since its initial public offering (IPO) in 2007.
(Source: “Summary Fact Sheet,” Main Street Capital Corporation, last accessed August 8, 2017.)
During this period, the S&P 500 Index returned 94.01%, the Russell 2000 Index returned 95.67%, while the BDC peer group returned 181.13%.
Yet Main Street Capital—a high-yield stock—managed to deliver a whopping 513.46% total return to investors.
One of the reasons behind the company’s success is its unique investment focus. Main Street specializes in providing debt and equity capital to companies with revenues between $10.0 million and $150.0 million and earnings before interest, tax, depreciation and amortization (EBITDA) between $3.0 million and $20.0 million. The size of these companies mean that large financial institutions aren’t really looking at them. In other words, lower middle-market companies represent an asset class with limited competition. This allows Main Street to earn attractive risk-adjusted returns from its debt and equity investments.
Moreover, Main Street is internally managed. This means the company is not paying someone else hefty management fees to oversee its investments. In the 12 months ended June 30, 2017, Main Street’s total operating and administrative costs came in at just 1.5% of its total assets. Lower expenses mean there’s more money left for shareholders.
Of course, what really makes this monthly dividend stock attractive is its handsome distributions. The company recently raised its monthly dividend rate by three percent to $0.19 per share. What’s more is that, on top of its regular monthly payments, MAIN stock has also been rewarding investors with supplemental cash dividends. The company has made two special dividend payments to shareholders every year since 2013.
Combining its monthly dividends with semiannual special payouts, Main Street Capital stock is yielding 7.1% at today’s price.
The following chart shows Main Street’s historical dividend, distributable net investment income, and net asset value per share since its initial public offering (IPO) in 2007.
(Source: “Dividends,” Main Street Capital Corporation, last accessed August 7, 2017.)
A Growing Business
The chart shows how Main Street has been raising its payout to investors. But, for the monthly dividend stock’s track record to continue, it needs to grow its business, too.
The good news is, Main Street’s business is firing on all cylinders. Over the years, both the company’s total investment income and distributable net investment income have grown substantially.
The company reported earnings earlier this month. In the second quarter of 2017, MAIN stock’s total investment income grew 17% year-over-year to $50.3 million. Distributable net investment income came in at $35.5 million, or $0.63 per share, representing a 19% increase from the year-ago period. (Source: “Main Street Announces Second Quarter 2017 Financial Results,” Main Street Capital Corporation, August 3, 2017.)
In the last 12 months, the company’s distributable net investment income provided 1.12 times coverage of its regular monthly dividends. This leaves a margin of safety for this monthly dividend stock.
(Source: “Investor Presentation Second Quarter – 2017,” Main Street Capital Corporation, last accessed August 7, 2017.)
As an investment company, Main Street manages its risk by having a well-diversified portfolio. Its investments are diversified across 192 companies coming from more than 30 different industries.
The company has more than $3.6 billion of investment capital under management, yet its average investment size is just $9.7 million. In fact, the largest individual company in Main Street’s portfolio represents just three percent of its total investment income.
This level of diversification means if one company or one industry enters a downturn, the impact on Main Street’s financials would be limited.
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Bottom Line on This Monthly Dividend Stock
One way to tell if a company is actually good is to see whether management is willing to put their money where their mouth is. In the case of Main Street, management seems to be confident about what they are projecting. By the end of June 2017, the company’s management and board of directors collectively owned $126.4 million worth of Main Street shares.
With a diversified business, growing financials, and generous payouts, Main Street Capital stock is a top monthly dividend stock for income investors.