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The Best Stocks with Monthly Dividends: Main Street Capital
06/30/2020 5:00 am EST
Monthly dividend stocks are securities that pay a dividend every month instead of quarterly or annually. More frequent dividend payments mean a smoother income stream for investors.
Our top monthly dividend stocks were selected based on their projected total annual returns over the next five years, but also based on a qualitative assessment of business model strength, future growth potential, and dividend sustainability.
Main Street is a business development company (BDC) that provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies.
Main Street defines lower middle market companies as generally having annual revenues between $10 million and $150 million. The company’s investments typically support management buyouts, recapitalizations, growth financings, refinancing and acquisitions.
As of the end of fiscal 2019, Main Street had an interest in 69 lower middle market companies, 51 middle market companies and 65 private loan investments. The company has a market capitalization of $1.42 billion and generated $157 million in net investment income last year.
Main Street has a diversified investment portfolio. On May 7th, the company reported first-quarter 2020 results. Distributable net investment income fell 6% year-over-year. On a per-share basis, distributable NII fell 10% to $0.61 per share, although this exceeded the $0.57 per share expected by analysts.
Net asset value per share of $20.73 at March 31, 2020 compares with $23.91 at the end of 2019. The coronavirus and low interest rates weighed on the company, but Main Street performed better than expectations last quarter.
Main Street has put together a solid record in the past decade. From 2010 through 2019, Main Street was able to grow net investment income by an average compound rate of 8.9% per year.
The company has (for now) maintained its monthly dividend at a rate of $0.205 per share, which works out to $2.46 annually. Main Street has an attractive yield of 7.7%.
In addition, we expect 2% annual distributable net investment income growth. Based on expected NII-per-share of $2, Main Street trades for a price-to-NII ratio of 16. This is slightly above our fair value estimate of 13.5. If the stock reaches a price-to-NII ratio of 13.5 in five years, it would result in an annualized drag of -3.3% on annual returns.
Overall, we see the potential for 6%-7% annual returns over the next five years for Main Street stock. Over-valuation makes the stock somewhat less appealing at the current price in terms of total return, although the high dividend yield of 7.7% is particularly attractive for income investors.
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