It is fun collecting dividends. Logging into my account and seeing another dividend payment make me feel so, well, awesome. But the question for the day. Are BDC Good for a Dividend Portfolio?
What is a BDC?
For starters, BDC stands for Business Development Company. They invest in medium and small cap companies. Congress in the USA created the structure for BDCs in 1980 to help emerging businesses raise funds to help with job growth. Like a REIT, they must payout 90% of their profits to shareholders.
First, Some Background
Main Street Capital (MAIN) is a BDC that focuses on long- term equity and debt investments in small and lower middle market companies. The company primarily invests Southern, South Central, and Southwestern regions of the US. Their investments are between $2 million and $75 million in companies with sales in the $5 million to $300 million range. They use several ways to invest, such as subordinated loans, private equity, and venture debt. Main Street Capital (MAIN) was created in 1997 and is in Houston, Texas.
One of our rules in investing is not wanting any company that sends out a K-1 Tax form. Looking at some BDC companies, they do use K-1 tax forms. After looking around, we do not believe Main Street Capital (MAIN) uses a K-1 tax form. The ones that do have LP in the name of their company, such as KKR & Co. LP (KKR). Please let us know if we are wrong about. We like avoiding K-1 tax forms to make tax time easier.
Our Favorite Part, The Dividend
There is a few neat points to their dividend that makes it special.
Monthly Dividend: They pay their dividend monthly, as opposed to a lot of companies paying a quarterly dividend. We like this, because we get our money sooner and more frequently. On top of that, they have a biannual dividend in June in December. So, they actually pay 14 dividend payments per year.
Regular Dividend: The regular dividend is funded by net investment income, such as from interest. Their regular dividend yield is a nice 6.1%. They have been paying a higher dividend payments for 6 years now, and we are expecting that to get up to 7 years later this year. The last 2 dividend raises happen in September, but they sometime raise twice a year.
Supplemental Dividend: The supplemental dividend is paid by capital gains of selling portfolio companies. We assume that profits from making capital gains is more random. Therefore, we do not expect this to be a stable number, even though it has been. We see this as a nice bonus, at its current rate, at another 1.5% dividend yield.
Overall: With 14 dividend payments a year, a total dividend yield of 7.5%, and starting to build a good record of increasing yearly dividend payments, adding Main Street Capital (MAIN) to our dividend stocks will be a nice addition.
What About the Value?
Main Street Capital (MAIN) is a bit expensive at its current price. With a 52-week high of $37.57, we are only 2.7% off of the high. We usually like to buy at a bigger discount to the 52-week high. Also, they trade at a higher multiple to book value than other BDC’s, with a price to book value of 1.7. Other BDC’s can trade around par or 1.0 times book value. However, they have a market cap $1.9 Billion and have been in business for 20 years. A lot of BDC’s are a lot smaller in size, like under $500 million, and have been in business for a shorter period of time. So, they might deserve a higher valuation.
Could we have bought at a better share price? Probably. However, with the nice dividend even today, we feel this is a good first entry point for this. If it goes lower, assuming we still like it, we are prepared to buy more shares.
Even though they are priced on the higher side today, interest rates maybe the reason. With Main Street Capital (MAIN) making money from debt, as interest rates increase, they collect more in interest. This can either be from their loans that have a floating rate or new loans starting at a higher rate. Because interest rates rise are projected to rise in the future, their profits will have a positive headwind.
Are BDC Good for a Dividend Portfolio
And to answer the main question of the day. Are BDC good for a dividend portfolio? I do not know about all of them. But, yes, there is room for one in our dividend portfolio. Especially this one. Being able to pick our stocks is a lot of fun.
What I bought
On 1/20/2017, we bought 27 shares of Main Street Capital (MAIN) for $986.82, including those amazing commissions we keep paying. With their regular dividend, we will get $59.94 a year added to our dividend income. With their supplemental dividends being paid out twice a year, we expect another $14.85, although we consider this a bonus check.
Does Main Street Capital (MAIN) belong in a dividend growth portfolio? Think we paid too much for this stock? Any other thoughts on BDC type stocks. Please feel free to share in the comment section below.
- MAIN – We own shares.
- KKR – We do not own shares or plan to buy in the next month.