Business development companies—BDCs—provide equity and debt financing to corporations that are too small to tap the public financial markets, observes Tim Plaehn, editor of The Dividend Hunter.
Main Street Capital Corp. (MAIN)—our top conservative pick for 2015—is the safest BDC bet for steady portfolio income.
MAIN is an internally managed finance company with admin and management costs equaling 1.6% of assets. These costs are much lower than the 3.3% average of internally managed and 3.6% for externally managed BDCs.
MAIN is more aggressive than most of its peers in taking equity stakes in client companies. Equity gains are paid out as separate special dividends to shareholders. The regular MAIN dividend is generated from interest on MAIN's debt portfolio.
The portfolio is broadly diversified across 176 client companies in over 30 different economic sectors. The average single investment amount is $7.3 million, reducing individual company risk in a $1.5 billion portfolio.
MAIN pays monthly dividends and currently yields 6.8% ($0.17 monthly dividend on $29.70 share price). The monthly dividend has been increased by ½ a cent nine times since 2008.
Over that time period, dividend increases have been announced, on average, every six months. Special dividends to pay out the equity investment profits are paid in May and November.
Investors who need an income stream can draw the regular monthly dividends for expenses and reinvest the special dividends to generate a growing monthly check.
When interest rates turn volatile—as expected in 2015—MAIN will provide a significantly higher level of stability compared to riskier BDCs.
