Unlock a “Secret Yield” of 7.3% From This Monthly Dividend Stock
If You Want to Earn Oversized Dividends, Read This
It doesn’t matter where you check; you will see that Main Street Capital Corporation (NYSE:MAIN) stock has an annual dividend yield of 5.9%.
That’s not a bad return, given that the average dividend yield of all S&P 500 companies stands at less than two percent at the moment.
But there is actually a way for investors to do better, even with the exact same Main Street Capital stock.
Let me explain.
Headquartered in Houston, Texas, Main Street Capital Corporation brands itself as a “one-stop” debt and equity solutions provider for lower-middle-market businesses in the U.S.
Lower-middle-market companies typically have annual revenues of between $10.0 million and $150.0 million. Because they are not as established as the big companies, it’s hard for them to get loans from banks.
As a result, when a lower-middle-market company needs money for management buyouts, recapitalization, growth, or acquisitions, it turns to lower-middle-market lenders such as Main Street Capital Corporation.
Right now, Main Street Capital provides both long-term debt and equity capital to lower-middle-market businesses. At the same time, it provides debt financing to middle-market companies, which are generally larger than lower-middle-market companies.
Through these investments, Main Street Capital earns a tidy interest income stream.
And because Main Street Capital chooses to be regulated as a business development company (BDC), it has to return a minimum of 90% of its profits to shareholders in the form of dividends. In exchange, the company can avoid paying most of the federal income taxes.
Thanks to this pass-through structure, shareholders of MAIN stock have been collecting oversized dividends. With a monthly dividend rate of $0.19 per share, the company offers an annual yield of 5.9%.
Main Street Capital Corporation Is a Generous Monthly Dividend Stock
That’s right. Instead of paying quarterly dividends like most companies, Main Street Capital rewards shareholders on a monthly basis. To investors who rely on their portfolio returns to cover monthly expenses, a more frequent dividend payment schedule is certainly good news.
But that’s not all. Because Main Street Capital also makes equity investments, it has an opportunity to grow its net asset value and generate some realized gains from its portfolio. Those realized gains provide a taxable income stream in excess of the company’s regular net investment income.
And because management is willing to return cash to investors, Main Street Capital often dishes out those gains as supplemental dividends.
The company declared its first supplemental dividend in November 2012. Then, in 2013, Main Street Capital moved to a semi-annual supplemental dividend schedule.
Note that I didn’t call these payments special dividends. That’s because special dividends tend to be one-time payments. At Main Street Capital, the supplemental cash dividends have been recurring every six months for more than five years. (Source: “Dividends,” Main Street Capital Corporation, last accessed June 18, 2018.)
How to Earn a Higher Yield Than What’s Listed on Google Finance
So, how can an investor add their name to the distribution list?
Well, it’s easy. Just like with regular dividends, Main Street Capital announces an ex-dividend date for its supplemental payments.
If an investor purchases shares of the company’s stock before the ex-dividend date, they will be entitled to the next payment. If an investor buys MAIN stock on or after the ex-dividend date, they will not receive the next payment. Instead, the dividend goes to the seller.
On April 18, Main Street Capital’s board of directors declared a supplemental cash dividend of $0.275 per share, with the ex-dividend date set to be June 18. The dividend was paid on June 26.
When will the company declare the next supplemental dividend?
Well, based on its payout schedule, the board of directors usually declares the supplemental dividend for the second half of the year in October, with the checks mailed out in late December. The ex-dividend date is usually set to be sometime in mid-December.
Earn a Safe, High Yield of 7.3%
Of course, supplemental dividends are not carved in stone. So, before taking out your wallet, let’s see how this BDC is doing in terms of financials.
Main Street Capital last reported earnings on May 3.
In the first quarter of this year, the company generated a net investment income of $0.63 per share, representing an 11% increase year-over-year. Distributable net investment income, which excludes the impact of share-based compensation expense, came in at $0.67 per share, up 10% from the year-ago period. (Source: “Main Street Announces First Quarter 2018 Financial Results,” Main Street Capital Corporation, May 3, 2018.)
Whichever metric you use, the amount was more than enough to cover the company’s total dividends of $0.57 per share declared during this period.
If everything goes as planned, Main Street Capital should have no problem maintaining its current monthly dividend rate of $0.19 per share and semi-annual supplemental dividends of $0.275 per share. At today’s price, that would translate to a total yield of 7.3%.
Investors wishing to lock in that yield should pay attention to the company’s next supplemental dividend announcement, which will likely arrive in October 2018.