Photo: Schuyler Shepherd
I'm always on the hunt for great dividend stocks.
And today, I'm on the prowl for the best underwriters in high-yield BDCs. Earlier, I looked at the historical underwriting of two of the largest BDCs.
Now I'm turning to the smaller BDCs: Main Street Capital (MAIN +0.07%) and Triangle Capital (NYSE: TCAP). These two companies finance primarily lower-middle market businesses, and both trade significantly above net asset value.
Looking at the books
Underlying every BDC is a collection of debt and equity investments. Over time, the performance of the underlying portfolio has the largest impact on the performance of each company's stock. A good portfolio means income and capital appreciation, which leads to dividends.
I went back through each company's history to compare net realized gains or losses to assets in any given year. This simple test is one way to look at the whole portfolio as it moves through time. Ultimately, it measures a company's underwriting abilities, or lack thereof.
Let's get to the numbers.
Source: SEC filings.
If a picture can tell 1,000 words, so can the chart above. From it, we can determine that both Main Street Capital and Triangle Capital have been very good stewards of their shareholders' capital. Losses have exceeded gains in only a few years, and today, both have realized more gains than losses.
Do note that I adjusted each company's realized gains or losses to reflect gains and losses realized since the end of their first quarterly earnings. Triangle Capital realized an $11.1 million gain on an equity investment since March 31, whereas Main Street Capital realized a loss of roughly $6.4 million on a portfolio company on non-accrual. These figures were added to gains or losses as of March 31.
Equity investments drive the bulk of realized gains or losses, of which Main Street Capital and Triangle Capital have many. As of this quarter, Triangle Capital's equity and warrant investments tally to 16% of its investment portfolio at fair value. Main Street Capital reports that roughly 23% of its portfolio is invested in equity and equity warrants in its portfolio companies.
In a downturn, equity can turn sour. But with the economy improving and valuations rising, Main Street Capital and Triangle Capital have both managed very well. Winners have exceeded losers, and if there's any reason these stocks trade significantly above NAV, it's their impressive histories.
Not only have these two thrown off the highest portfolio yields in their industry, but they've done so while generating cumulative net realized gains.
