A High-Yield Stock to Think About
Main Street Capital Corporation (NYSE:MAIN) may not sound like a familiar name to most people, but there are two obvious reasons why it stands out compared to other stocks in today’s market.
The first reason is its yield.
Interest rates and market dividend yields are currently near the low end of their historical averages. The 10-year U.S. Treasury note yields just 0.95% at the time of this writing. Meanwhile, the average dividend yield of companies in the S&P 500 is a measly 1.6%. (Source: “S&P 500 Dividend Yield,” multipl.com, last accessed December 8, 2020.)
Main Street Capital Corporation, on the other hand, currently offers an annual dividend yield of 7.7%.
The second reason is the company’s payout frequency.
You see, among the stocks that have a regular dividend policy (plenty of companies don’t pay any dividend at all), the vast majority of them have a quarterly distribution schedule, meaning shareholders have to wait three months between dividend payments.
The wait time for MAIN stock investors, though, is much shorter; Main Street Capital is a monthly dividend stock.
So, what we have here is a high-yield stock that pays investors on a monthly basis, which, given the current economic environment, may prompt the question of whether the payout is too good to be true.
To answer that question, let’s take a look at what the company does.
Headquartered in Houston, TX, Main Street Capital is a business development company (BDC) that provides capital to private U.S. companies. To be specific, it makes debt and equity investments in lower-middle-market businesses that generally have annual revenues between $10.0 and $150.0 million and annual earnings before interest, taxes, depreciation, and amortization (EBITDA) between $3.0 and $20.0 million. (Source: “Investor Presentation: Third Quarter – 2020,” Main Street Capital Corporation, last accessed December 8, 2020.)
Because lower-middle-market businesses tend to be under-served by traditional banks, Main Street Capital can earn oversized interest income by lending to them.
Obviously, lending to smaller companies can also carry more risk. But here’s the thing: since Main Street Capital completed its initial public offering (IPO) in 2007, it has never cut back its dividend. (Source: “Dividends,” Main Street Capital Corporation, last accessed December 8, 2020.)
Consider this: the BDC’s first distribution to investors after it went public was a quarterly cash dividend of $0.33 per share. That’s $1.32 per share annualized. As I said, Main Street Capital stock is now a monthly dividend stock, and its current monthly payout of $0.205 per share comes out to $2.46 per share annualized. So essentially, the company’s annualized dividend has grown by 86.4% since its IPO.
Now, the COVID-19 pandemic has impacted the business of most BDCs. And unsurprisingly, dividend cuts are not uncommon in this sector. MAIN stock, however, has managed to maintain its oversized payout.
In fact, the company has already declared dividends for the first quarter of 2021. The monthly dividends of $0.205 per share—consistent with what it was paying before the pandemic—will be distributed on January 15, February 12, and March 15, 2021. (Source: “Main Street Announces First Quarter 2021 Regular Monthly Dividends,” Main Street Capital Corporation, November 4, 2020.)
Counting these upcoming payments, Main Street capital has declared $30.22 per share in cumulative cash dividends since it went public. Considering that the company’s IPO price was $15.00 per share, investors who bought Main Street Capital stock during the IPO and still hold it today will have earned a return of more than 200% from dividends alone.
And in case you’re wondering, MAIN stock more than doubled from its IPO price and now trades around $32.00 apiece.
That being said, the pandemic did impact the BDC’s business. In the third quarter of 2020, Main Street Capital generated distributable net investment income of $0.50 per share, a 24.2% decline year-over-year. The amount was also lower than its three monthly dividends totaling $0.615 per share paid for the quarter. (Source: “Main Street Announces Third Quarter 2020 Results,” Main Street Capital Corporation, November 5, 2020.)
However, management said they believe the third quarter was the low point for the company’s distributable net investment income, and that things will start to improve.
Main Street Capital’s chief financial officer, Brent Smith, said, “As we look forward to the fourth quarter, we expect that we will generate distributable net investment income of $0.53 to $0.56 per share as our results begin to recover from the impacts of the pandemic and set us on a pace and expectation to cover our monthly dividend rate with distributable net investment income over the next few quarters.” (Source: “Main Street Capital Corporation (MAIN) CEO Dwayne Hyzak on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, November 6, 2020.)
Bottom Line on Main Street Capital Corporation
Put it together and it becomes clear why Main Street Capital stock deserves investor attention.
If the company can improve its distributable net investment income in the quarters ahead, as management projects, MAIN stock would represent a solid high-yield monthly dividend opportunity.