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With the central bank shifting its policy with regards to interest rates and a U.S. presidential election year coming up, more volatility may await passive income investors in 2024.
With more volatility possibly on the horizon next year, passive income investors may want to prioritize high quality BDCs with proven track records, like Main Street Capital Corporation (NYSE:MAIN).
The BDC reported robust results all throughout 2023 and continued to comfortably cover its dividend with net investment income in the last quarter.
Though Main Street Capital still sells at an uncomfortably large premium to net asset value, I think MAIN will be a great income stock for 2024.
My Rating History
My last stock classification for Main Street Capital was Buy. The BDC’s portfolio value reached an all-time high with respects to its portfolio value at the time and my favorable view on the BDC was driven primarily by Main Street Capital’s competency to grow its dividend pay-out.
Though MAIN is still the most expensive BDC in the sector, based on net asset value premium, I think that the BDC is a solid investment for passive income investors, even if markets become more volatile and choppy.
Why Main Street Capital?
Main Street Capital is an internally-managed BDC, which had its IPO back in 2017 and which has earned a reputation as a reliable dividend payer over time. Main Street Capital primarily pursues yield opportunities in the lower middle market which has been abandoned by financial institutions following the Great Recession in the 2000s.
Main Street Capital’s main focus is First Liens which are highly secured and have a protected capital position. First Liens accounted for 99% of the BDC’s investments in the lower middle market portfolio. The LLM portfolio included 79 portfolio companies and was valued at $2.2 billion.
LMM Investment Portfolio (Main Street Capital Corp)
Financial Performance, Pay-Out Ratio, Dividend Growth
Main Street Capital has run from one new portfolio value record to the next within the last year and the BDC’s total portfolio was valued at $4.3 billion at the end of the third quarter (including private and middle market loans).
This growth in portfolio value has yielded record distributable net investment income for the BDC and Main Street Capital has consistently been able to pass on income growth in the portfolio to shareholders via a growing monthly dividend.
Portfolio Value Growth (Main Street Capital Corp)
As we can see from Main Street Capital’s breakdown of its quarterly performance, the BDC has profited from an 18% YoY increase in its distributable net investment income per share in the third quarter.
The BDC substantially benefited from the central bank’s interest rate uplift in 2023 which in turn yielded robust growth in DNII.
Main Street Capital earned $1.04 per share in distributable net investment income in 3Q-23 while distributing $0.965 per share, leading to a pay-out ratio of 93% (66% without the special dividend of $0.275 per share).
Distributable Net Investment Income Per Share Growth (Main Street Capital Corp)
Main Street Capital raised its monthly dividend from $0.235 per share to $0.24 per share in the first quarter of 2024, yielding a dividend raise of 2%. Passive income investors can continue to look forward to receiving special dividends, which are meant to distribute excess portfolio income.
In 2023, Main Street Capital paid a total of $0.95 per share. The yield based on the regular monthly dividend presently stands at 6.7%. Including a special dividend equivalent of $0.95 per share, Main Street Capital is set to yield 8.9% effectively.
Main Street Capital: Still The Most Expensive BDC In The Sector
Main Street Capitals 9% dividend is priced at a 52% premium to net asset value which makes the BDC, as far as I am aware, the most expensive BDC stock that passive income investors can buy.
Income-oriented investors have argued for a long time whether or not this premium is justified, particularly because so many other BDCs offer comparable or higher yields at much lower NAV valuations.
With that being said, though, the value of an investment in Main Street Capital comes with the implicit assurance that the BDC will continue to grow it monthly dividend (and pay special quarterly dividends in order to distribute incremental portfolio income). I think that the 52% premium to NAV is justified, particularly since the dividend is most likely going to grow in 2024.
Though other BDCs trade at net asset value, or at least at lower premiums, Main Street Capital is the ultimately sleep-well BDC that puts dividend growth on auto-pilot.
Low-Rate Environment, Other Headwinds For Main Street Capital
The central bank updated its interest rate policy in December and indicated that it would pursue up to three rate cuts in 2024 which may lead to an increase in market volatility next year. 2024 is also going to be a presidential election year in the United States which may also introduce a couple of wild cards into markets.
However, as far as dividend quality and stability are concerned, I have no reservations with respect to Main Street Capital.
My Conclusion
With 2023 coming to an end, a major interest rate policy shift having been announced and a presidential election year coming up, I think passive income investors will be able to ride out any kind of increased market volatility with an investment in Main Street Capital.
The BDC’s dividend might not be cheap, and the degree to which the large NAV premium is justified is up to discussion, but I think passive income investors can do nothing wrong with owning Main Street Capital in 2024.
BDCs with proven track records and record distributable net investment income are solid investments for passive income investors, in my view, and the dividend as well as the yield are set for ongoing growth in 2024.
