Dividend Hunter Finds Value on Main Street

07/14/2020 5:00 am EST

Focus: FINANCIALS

Tim Plaehn

Lead Income Analyst, The Dividend Hunter

Main Street Capital Corporation (MAIN) is a business development company (BDC). This type of company provides debt and/or equity financing to small and medium-sized corporations, explains income expert Tim Plaehn, editor of The Dividend Hunter.

BDCs operate under special legal and tax rules that make them pass-through entities. They do not pay corporate income tax and are required to pay out 90% of earnings as dividends to investors.

Main Street Capital a high-quality company — by far the top of the pack out of the 50 or so publicly traded BDCs. Most BDCs focus on the lending side, making high interest rate loans. The big challenge of the BDC business model is loan defaults, which are inevitable from the types of companies served by the BDC sector.

Main Street Capital has taken a different approach. It views itself not only as a lender, but also as a partner to many of its customers.

As a partner, it receives equity ownership in the businesses and provides expert advice to help the companies succeed. Main Street Capital continues to receive partnership distributions even after loans have been paid off.

If a client company gets sold, Main Street Capital will earn capital gains. The result is that the company has paid monthly dividends that have steadily increased since the company went public a decade ago. Many other BDCs were forced to cut their dividend rates during that same period of time.

For the last seven years, Main Street Capital has also paid semiannual bonus dividends, the result of gains in the equity investments. Management has stated that the semiannual extra dividends will be phased out, with the amounts added into the monthly dividend rate instead. Main Street Capital has been a Dividend Hunter stock since July 2014.

The Main Street Capital stock price is down 33% compared to pre-crash levels. The company has suspended its semi-annual dividend payments but has committed to continue the monthly dividends, giving the stock an 8% yield.

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