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3 Reasons to Buy Main Street Capital

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If you follow the financial sector as I do, you tend to keep an eye on certain banks and financial companies. Investors scouring the financials for income tend to focus on REITs of various types, especially mega yielding mREITs like Annaly Capital (NYSE: NLY  ) .

But there is another small but growing segment in the financial services industry that merits attention. Business development companies, or BDCs, are publicly traded private equity firms that invest in companies at various stages of development, providing much-needed capital for stakes in the company. Many of the companies in this sector pay high dividends, but one of my particular favorites is Main Street Capital (NYSE: MAIN  ) . What follows is three reasons why I think Main Street Capital would be a great addition to your portfolio.

1. Business model
In a couple of ways, a BDC is very similar to a REIT. They receive special tax treatment as long as they pay out at least 90% of their earnings as dividends. They also tend to benefit from the low interest rate environment that we currently find ourselves in, as they are able to borrow money at low rates and invest in the particular type of company that they choose.

Since I fully believe that the economy will get better before it gets worse, Main Capital should continue to have success as the economy continues to improve. By providing equity capital to "lower middle market companies" -- companies with annual revenues between $10 million and $150 million -- Main Street focuses on businesses with names that you may not recognize, but companies that are nonetheless important in providing economic input and jobs to citizens. In turn, they will provide higher income to Main Street Capital as their performance improves, boosting its performance.

2. Dividend
Better performance can only lead to more income, and in turn, higher dividends for shareholders. Main Street is already unique among similar companies because it pays its dividend monthly as opposed to quarterly. Its dividend has gradually grown since it started paying monthly dividends in September of 2008, helping to push its current yield to around 6%. Combine that with a special dividend of $0.35 per share to be paid out in January, and you'd have a quick boost to your investment, though you only have until January 4th to reap the benefits of the payment.

One great benefit to a monthly dividend is regular monthly income. With the majority of companies paying dividends quarterly, and often in the same quarter as everyone else, it could be difficult to spread your income throughout the year. If you are participating in a dividend reinvestment plan, it also allows for monthly dollar-cost averaging within your investments.

3. Recent stock performance
My colleague John Maxfield points to one problem with BDCs: high dividend payments tend to depress the value of the stock because the companies don't retain earnings and have difficulty appreciating in value. This, however, doesn't appear to be the case for Main Street, at least over the past year, a time frame that has seen its stock performance outperform peers like Apollo Investment (NASDAQ: AINV  ) and Prospect Capital (NASDAQ: PSEC  ) , as well as strong performing Dow stocks like Procter & Gamble (NYSE: PG  ) and Johnson & Johnson (NYSE: JNJ  ) :

MAIN Chart

MAIN data by YCharts.

Though I must caveat that past performance is not always an indicator of future performance, this strong performance over the past year cannot be ignored. If it is able to continue to perform at even half this rate going forward, it will make a lot of investors happy, including me. It truly is a sector leader and should be considered as an addition to your portfolio.

The Foolish bottom line
The three reasons I've provided above should not be the only reason you purchase Main Street Capital if you decide to do so, but they were enough for me to purchase some shares a few months ago. I encourage you to do your own due diligence into the company and hope that this is a good starting point as you delve deeper into your research.

If Main Street Capital isn't quite your thing, Annaly Capital Management is another company that you should consider. However, there are some crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand new premium research report on the company, our analyst runs through these absolute must know topics, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2012, at 1:26 PM, prginww wrote:

    In addition to the special dividend that will be paid in January, management has already stated that they are positioned to pay out special dividends at the end of 2013 and 2014.

    Further, they had $0.96/share of spillover taxable income at the end of Q3. The maximum they are allowed to have is $1/share, so once they hit $1/share they will be forced to pay out additional special dividends.

  • Report this Comment On November 28, 2012, at 6:41 PM, prginww wrote:

    Thanks aufergy. Even better. Special dividends are pretty awesome!

  • Report this Comment On November 28, 2012, at 7:48 PM, prginww wrote:

    Bought MAIN and another BDC, TCAP late in 2011..have really enjoyed the dividends and the price increases. I was actually thinking about taking 1/3 off the table as soon as the gain would qualify as LT for tax purposes (since my gain is about 40% in both), and leave the rest to run. Thanks for the information!

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