Supplemental Dividends Are the Same as Special
When I wrote about TSLX in my previous post, I said TSLX was paying a special dividend. MAIN calls their non-repeating “special” dividend a “supplemental” dividend. These dividends can be viewed as one and the same. You cannot expect them to appear with any regular frequency, but they are a nice boost for income in retirement. I think of it as a “bonus” in retirement.
A New Supplemental Dividend for MAIN
In addition to the normal monthly dividend of $0.24 per share, MAIN is paying a supplemental dividend of $0.30 per share in March. MAIN does not have a strong history of paying supplemental dividends, so investors should welcome them when they arrive but not expect them as a normal thing. If you do the math, you will see that we will receive $1.02 per share in MAIN dividends during the quarter. The normal quarterly dividend is $0.24 times three ($0.72/share), as MAIN pays a monthly dividend.
Total Ten-Year Returns Are Excellent
It is a mistake to ONLY look at the price returns for MAIN. If you do that, you will conclude that MAIN is a poor long-term investment. However, if you include total returns in the analysis, you will see that the ten-year returns are 173%, which is a little more than the S&P 500’s ten-year returns of 167% on the following image.
Stock Rover Graph
The Stock Rover dividend graph might cause some investors concern. 2019-2020 show lower dividends. However, special dividends do play a part in this. In general, MAIN has been increasing dividends with a 5 Year Growth Rate of 3.78%.
Company Profile
Main Street Capital Corporation is a business development company specializes in equity capital to lower middle market companies. The firm specializing in recapitalizations, management buyouts, refinancing, family estate planning, management buyouts, refinancing, industry consolidation, mature, later stage emerging growth. The firm also provides debt capital to middle market companies for acquisitions, management buyouts, growth financings, recapitalizations and refinancing. The firm seeks to partner with entrepreneurs, business owners and management teams and generally provides “one stop” financing alternatives within its lower middle market portfolio. It prefers to invest in air freight and logistics, auto components, building products, chemicals, commercial services, computers, construction and engineering, consumer finance, consumer services, electronic equipment, energy equipment and services, financial services, health care equipment, health care providers, hotels, restaurants, and leisure, internet software and services, IT Services, machinery, oil, gas and consumable fuels, paper and forest products, professional and industrial services, road and rail, software, specialty retail, telecommunication, consumer discretionary, energy, materials, technology, and transportation. The firm typically invests in lower middle market companies generally with annual revenues between $10 million and $150 million. It prefers to invest in ranging between $2 million and $75 million in equity investment and enterprise value in ranging between $3 million and $20 million. The firm typically prefers to invest in the range of $5 million and $50 million per transaction in debt investment value and in the range of $1 million and $20 million in annual EBITDA. The firm’s middle market debt investments are made in businesses that are generally larger in size than its lower middle market portfolio companies. It takes 5 percent minority and up to 50 percent majority equity investments. Main Street Capital Corporation was founded in 2007 and is based in Houston, Texas with an additional office in Chojnów, Poland.
Recommendation
MAIN is not the only BDC in our portfolio, but it is the largest of the ones we own. MAIN is classified in the “Financial” sector, and they are in the “Financial Services” industry group. Other Financial Services investments we hold include ABR, ARCC, BCSF, CGBD, CSWC, GAIN, HRZN, MAIN, OBDC, OMF, PNNT, SAR, and TSLX. MAIN is our largest BDC holding. Therefore, if you want to enter the world of BDCs for your investments, think diversification. Don’t buy just one. If your portfolio is at least $250,000, then it might be a good income strategy in retirement to own shares of two or three different BDCs.
Full Disclosure
Cindie and I own 3,326 shares of MAIN as a long-term investment. It is one of our Top Ten Holdings.
Know Your Flocks & Herds 
Hi Wayne, I first became aware of BDCs from postings on the Fidelity Investor community page, I know that people like them for income but I fail to understand their Total Return. For example the chart shows that the ten year total return for MAIN is 173%.
The ten year price appreciation shows to be 45.2%, then if we add ten years of dividends will be 10×6.4=64% for a total of 64+45.2=109.2% What am I missing here?
Then my second question to you is that if you DON”T need dividends to live on, is it worth the time investigating BDCs as opposed to putting all your 200,000 you suggested into an S&P 500 index fund
Thank you in advance for taking the time to reply,
Jim
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Hi Jim,
Good questions. If you put all of your assets into an S&P 500 index fund, you run a bigger risk due to the cap-weighting of that fund, in my opinion. At the present time the top ten holdings in the index comprise over 30% of the total assets of the index. It makes more sense to put 80% of your assets in an index fund, perhaps an equal-weighted fund, and then diversify into small and mid-caps and some BDCs and REITs. Of course, the last ten years have been good for the S&P 500, but at some point a person probably needs to think about transitioning to retirement income. I think it is best to start building income into your model sooner rather than later. Furthermore, my model is dividend growth. The index is not a good proxy for that model.
I’m confused as to why you would use the 6.4 yield as the multiplier for ten years. The yield varies over time and the yield does not include the special or supplemental dividends being paid. For example, in addition to monthly dividends, there were four special dividends in 2023 and 2022.
It may be true that there is something wrong with the Seeking Alpha charting, but I don’t think there is an easy way to disprove it. In fact, I get similar results when I use StockRover – but I don’t think I can change it to show only ten years. It is likely that most models assume automatic reinvestment of the dividends, based on what I have seen in the past.
Does that help?
Wayne
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