Wednesday, July 17, 2024

A Monthly Dividend Payer With a 5.7% (and Rising) Yield

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A Monthly Dividend Payer With a 5.7% (and Rising) Yield

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Main Street Capital (NYSE: MAIN) is a popular business development company, or BDC, that lends to and invests in businesses that are cash flow positive and generate at least $10 million in revenue per year.

It currently has 191 companies in its portfolio and pays a 5.7% dividend yield.

The stock has become a favorite of income investors thanks to its juicy yield, its monthly payouts, and the fact that it has increased its annual dividend every year since 2011.

But will Main Street be good to Wall Street and maintain its payout?

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To determine whether a BDC can afford its dividend, we look at its net investment income (NII). This is the money it generates from lending to and investing in other businesses, minus related expenses.

Main Street's NII has been soaring.

In 2023, the company generated $339 million in NII, a 38% increase year over year and an 85% increase over 2021's total.

Chart: Main Street's NII
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Last year, Main Street Capital paid out $272 million for a payout ratio of 80% of its net investment income. By law, BDCs must return at least 90% of their earnings to shareholders, so it's not unusual for them to pay out nearly all of their net investment income. (Keep in mind that net investment income is not the same as earnings.)

A payout ratio of 80% is comfortably below my threshold of 100% for BDCs, but as we all know, a lot can change in a year.

Here's where I think Main Street's NII and payout ratio are headed this year (and how the dividend could be affected)...

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