Main Street Capital: Best-in-Class

02/08/2016 7:00 am EST

Focus: STOCKS

Tim Plaehn

Investment Research Analyst, Investors Alley

Legally, a BDC is a closed-end investment company that makes direct investments into its client companies, explains Tim Plaehn, editor of The Dividend Hunter.

A BDC will have up to hundreds of investments to spread the risk across many small companies. The client companies of a BDC will be corporations that are too small or too new to be able to issue stock or bonds into the publicly traded markets.

Main Street Capital (MAIN) is the best-in-class BDC and the most conservatively managed company in the sector. Since its 2007 IPO, MAIN has doubled the total return of a BDC index.

MAIN is internally managed with insiders owning over 2.8 million shares. Co-founder, chairman, and CEO Vince Foster is the single largest individual shareholder.

MAIN uses a two-tier approach to its portfolio. This unique strategy allows Main Street to generate a high level of interest income and also capital gains from equity investments.

In the middle market, MAIN provides debt financing to companies with stable finances and low risk of default. Currently, Main Street has 85 middle market clients with an average loan amount of $7.8 million. Middle market loans are floating rate.

In the lower middle market, the company takes equity stakes along with providing debt financing. The equity provides a significant boost to the total returns generated.

The result has been a BDC that has generated both regular dividend growth for investors and special dividends to pay out capital gains. As an additional bonus, MAIN pays monthly dividends.

MAIN currently yields 7.6%. Also, the company has been paying a special dividend twice a year to pay out some of the profits from the lower middle market equity investments.

Over the last year, the two payments have totaled $0.55 per share, bringing the total yield to over 9%.

MAIN should be a core holding for any income-focused investor. Establish an initial position and be ready to add shares during market corrections.

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