As the central bank shifts its interest rate policy and with a U.S. presidential election year on the horizon, passive income investors may face increased volatility in 2024. In times of uncertainty, it’s essential to prioritize high-quality Business Development Companies (BDCs) with a proven track record. One such company is Main Street Capital Corporation (NYSE:MAIN).
Main Street Capital continued to impress throughout 2023, comfortably covering its dividend with net investment income in the last quarter. Despite trading at a premium to net asset value, Main Street Capital remains a promising income stock for 2024.
Main Street Capital’s Impressive Track Record
My last stock classification for Main Street Capital was Buy. The BDC’s portfolio value reached an all-time high, underlining its ability to grow its dividend pay-out. While it remains one of the most expensive BDCs in the sector, Main Street Capital is a solid investment choice, especially in the face of potential market volatility.
Why Main Street Capital Stands Out
Main Street Capital, internally-managed since its IPO in 2017, has earned a reputation as a reliable dividend payer. It primarily focuses on yield opportunities in the lower middle market, an area abandoned by financial institutions following the Great Recession. With a predominant focus on First Liens, the company’s investments are highly secured, emphasizing a protected capital position. In 3Q-23, Main Street Capital earned $1.04 per share in distributable net investment income and raised its monthly dividend by 2% in the first quarter of 2024.
Financial Performance and Dividend Growth
Main Street Capital has consistently achieved new portfolio value records, reaching $4.3 billion by the end of the third quarter. This growth has translated into record distributable net investment income and continual growth in its monthly dividend. The company benefited from an 18% year-over-year increase in its distributable net investment income per share in the third quarter, propelled by the central bank’s interest rate uplift in 2023.
Main Street Capital’s Premium Valuation
Despite Main Street Capital’s 9% dividend being priced at a 52% premium to net asset value, the implicit assurance of continued dividend growth justifies this premium. While other BDCs may offer comparable or higher yields at lower NAV valuations, Main Street Capital is considered the “sleep-well” BDC, putting dividend growth on auto-pilot.
The central bank’s updated interest rate policy, with the potential for up to three rate cuts in 2024, may lead to increased market volatility. Furthermore, the approaching U.S. presidential election introduces additional uncertainty. However, Main Street Capital’s dividend quality and stability offer a sense of reassurance amid these headwinds.
As 2023 draws to a close and significant policy shifts are on the horizon, passive income investors can find solace in the stability offered by an investment in Main Street Capital. While the BDC’s dividend may not be inexpensive, the promise of ongoing growth in both dividend and yield further cements its position as a sound investment for 2024.