Business Development Companies
Even little dividend increases are a pleasant addition to the dividend growth strategies. Companies like CSWC and MAIN are not likely to show huge dividend increases. They offer, as an alternative, exceptionally high yield for those who can handle volatility and more “risk.”
Recently both MAIN and CSWC announced increased dividends. MAIN increased the monthly dividend by 2.1% and CSWC increased their quarterly dividend by 1.8%. The MAIN Board of Directors also declared a supplemental cash dividend of $0.275/share; payable Dec. 27; for shareholders of record Dec. 20; ex-div Dec. 19. CSWC’s pays a Supplemental Dividend of $0.06 per share payable Dec. 14; for shareholders of record Dec. 15; ex-div Dec. 14.
Main Street Capital
Main Street Capital is certainly one of our top ten holdings. It is in the financial sector, and the industry classification is “Asset Management and Custody Banks.” The market cap for MAIN is $3.14B. The current Seeking Alpha QUANT rating is a BUY at 4.22 and the yield is a decent 7.18%. The other thing I like about MAIN is it pays a monthly dividend. We own 3,200 shares (and our grandchildren also have shares in their UTMA accounts) so our shares are currently worth $125,760.
MAIN has a strategy I like: MAIN’s “Strategy Produces Differentiated Returns.” This includes “Sustain and Grow Dividends,” “Meaningfully Grow Net Asset Value (NAV) Per Share,” and “Supplement Growth in DNII with Periodic Realized Gains.” DNII is Distributable Net Investment Income.
MAIN has 79 portfolio companies worth an estimated $2.2 billion in fair value. As you can see, the market cap is greater than the value of the portfolio companies, but this makes sense given the income being given by this investment.
Capital Southwest
Capital Southwest is also a large holding currently worth $76,968 in total in our accounts. Like MAIN, it is in the financial sector, and the industry classification is “Asset Management and Custody Banks.” The market cap for CSWC is $864.54M. In other words, it is a much smaller business than MAIN. However, the current Seeking Alpha QUANT rating is a STRONG BUY at 4.68 and the yield is a decent 10.66%. “Capital Southwest (NASDAQ: CSWC), is an internally-managed, credit-focused BDC that is an active capital provider to lower middle market companies across the capital structure.” – SOURCE: CSWC website
CSWC currently has 94 portfolio companies in various sectors. So, like MAIN, it is diversified. The diversification is in companies you cannot generally buy via the stock market. This is an added attraction to me. The vast majority of these investments are First Lien Investments. In other words, if something bad happens, CSWC is first in line to collect on their investment in the companies in their portfolio.
Easy Income is Designed to be Easy
It bears repeating – I don’t want to spend many minutes every day looking at investments or buying or selling investments. I do spend 20-30 minutes trading options early each week for additional income, but I do not trade options on our MAIN or CSWC shares. The dividends are enough of an incentive to keep our shares. So the easy income I desire is the best way to get additional spendable income without any extra work.
Cash Covered Put Options – An Aside
This is not related to CSWC or MAIN, but yesterday I did sell a cash covered put option on the shares of NVTS and LTHM. Both positions were recommended by a service I use called Strategic Fortunes. I don’t often follow their advice, but there are times when I think their recommendations have merit. Strategic Fortunes was not recommending PUT options. Rather, they suggested their readers actually buy the shares. Rather than buy them at the current market price, I enter the PUT orders to get additional income and to see if I can get some shares at an even lower price.
Metrics Matter
When I consider an investment to buy, or when I am trying to determine if I should add shares, I look at Seeking Alpha. While the yield is a nice number to know, I am more interested in the dividend payout ratio, the 5-year growth rate of the dividend, and the number of years the dividend has been increased. I consider a payout ratio of less than 50% to be ideal. Ten years of dividend growth is an indication the company takes dividend growth seriously.
MAIN and CSWC don’t hit all of the marks on this. CSWC has a payout ratio of 82.38%, but this is acceptable for a BDC. Remember, the goal is current income, and they don’t need to retain all of their income for additional investments. CSWC has a five-year dividend growth rate of 12.94%.
MAIN has a payout ratio of 68.25% and a five-year dividend growth rate of 3.51%.
In Conclusion
CAUTION: Remember that investments in individual BDCs must be done with wisdom. Don’t put more than 3-5 percent of your total investment capital in any single investment, regardless of the type of investment.
Think Very Long Term
One of the ways I think long term is to live by faith. It is not faith in my investments. It is faith in the God who created me and who has justified, redeemed, and adopted me into his family. I am not ashamed of the gospel. Paul says this in the book of Romans:
“For I am not ashamed of the gospel, for it is the power of God for salvation to everyone who believes, to the Jew first and also to the Greek. For in it the righteousness of God is revealed from faith for faith, as it is written, ‘The righteous shall live by faith.’” Romans 1:16-17
Know Your Flocks & Herds 