Income Expert Walks Down Main Street

12/12/2014 7:00 am EST


Chloe Jensen

Chief Analyst, Cabot Dividend Investor

For the High Yield tier of our portfolio, I’ve found a perfect opportunity in a stock with a great track record and a 6% yield, explains Chloe Lutts Jensen, editor of Cabot Dividend Investor.

Business Development Companies, or BDCs, are a special kind of investment corporation that make debt and equity investments in small, non-public companies.

The whole BDC group took a big hit earlier this year when S&P and Russell both removed BDCs from their indexes for reporting reasons. That meant funds that tracked those indexes had to divest all their BDC positions.

Today, investors are beginning to return to BDCs and the sector is recovering, but most are still on sale compared to where they started the year.

Main Street Capital (MAIN) is one of the highest-quality BDCs in the industry, with a long and stable history of rewarding investors, a strong financial position, and a diverse portfolio of small company investments.

As investors return to this high yielding sector, I expect them to flock to MAIN for its proven track record and pristine financials.

Main Street is a monthly dividend payer and has one of the best dividend histories in the BDC sector. Main Street has paid dividends since 2007 and has increased the regular dividend every year since 2011.

The best indicator of Main Street’s quality is the simplest: earnings. Net Investment Income (NII) has increased every year for the past five years, with annual growth averaging around 17%.

But I’ve also dug into the company’s investment portfolio, and their own finances, where we find an equally bright picture of Main Street’s quality.

Main Street’s portfolio is diverse. This isn’t by accident. Management diversifies their investments among industries, geographic regions, and end markets so their portfolio is more resistant to major economic events.

The one thing most of their investments have in common is an established business, positive cash flow, and some type of competitive advantage or moat.
Main Street also has equity investments in many of its companies, which can provide a nice kicker when Main Street exits the position.

There are cheaper BDCs out there, but I don’t think there are any better. I recommend buying MAIN now for yield, dividend growth, and long-term appreciation.

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