The reason why we all invest in publicly-traded companies (by buying shares) is to earn a return on our money.

We invest to protect and grow wealth.

Well, the US stock market has, historically speaking, been a great mechanism for this.

The S&P 500 (an index of approximately 500 of the largest US companies) has averaged a compounded annual return rate of about 10% over the last several decades.

Using the Rule of 72 (a common shorthand for figuring out the results of different rates of compounding), a 10% compound annual growth rate in your money doubles your wealth every seven years.


But there’s something missing here, right?

Many of us also invest in order to derive income from our investments and “monetize” our wealth.

After all, a big pile of money does no good if one can’t spend it.

That’s precisely where dividends enter the picture.

And not just dividends.

I’m talking about dividends that are reliable.

I’m talking about dividends that are large.

Large enough to even cover the bills.

Better yet, many companies out there are routinely growing their dividends, regularly sending out ever-larger cash payments to shareholders.

That protects your purchasing power against the ravages of inflation, which will slowly eat away at static income.

Inflation is the general increase in prices of goods and services over time.

It’s this sneaky force that sneaks up on you and tackles you from behind.

A passive income source that is reliable, big, and growing?

That’s armor against a lot of life’s problems, including inflation.

Life is hard.

Why not make it a little bit easier with totally passive dividend income that can safely offset your expenses and rise in tandem with, or faster than, those expenses?

With all of that in mind, I want to cover a high-yield dividend growth stock that can help you to cover your bills and make your life a lot easier…

Main Street Capital Corp. (MAIN)

Main Street Capital Corp. (MAIN) is a business development company providing debt and equity capital to smaller, private businesses.

Founded in 2007, Main Street Capital now has a market cap of $3.5 billion.

A BDC like Main Street Capital fills a funding gap in the marketplace, and increasing regulation on banks would point to the likelihood of that funding gap only widening over time.

Depending on the size and type of business that seeks financing, Main Street Capital can offer debt and/or equity capital.

Main Street Capital primarily provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies.

This type of investment vehicle is a way for retail investors to gain access to private equity and private credit.

Main Street Capital has multiple ways to make money.

It can generate income from its debt investments.

And it can generate dividend income and capital appreciation from its equity investments.

Main Street Capital’s portfolio includes investments in 195 different businesses, with an average investment size of approximately $19 million.

The portfolio is incredibly diversified across regions (in the US) and industries (ranging from auto components to software).

There’s also resiliency built into the portfolio, as the largest investment in the portfolio represents less than 4% of total investment income.

Investing in Main Street Capital is essentially betting on this management team’s ability to allocate capital, generate investment income, and deliver a satisfactory return over the long run.

The good news on this front is that management has experience and shareholder alignment.

Regarding the former point, members of Main Street Capital’s management team, who manage this BDC internally, have over 100 years of collective investment experience, along with relationships of working together that date back over 20 years.

On the latter point, Main Street Capital’s management and board of directors own approximately 3.5 million shares worth about $150 million.

Owning over 4% of the company is significant “skin in the game”.

Simply put, investors in Main Street Capital are positioned to prosper alongside the experienced and involved management team.

Part of that prospering is occurring via a very large, growing dividend that is special in more ways than one.

Dividend Yield And Growth

How large of a dividend are we talking bout?

Well, the stock yields a monstrous 6.7%.

That’s more than four times higher than the broader market’s yield.

This yield is also 10 basis points higher than its own five-year average.

Most stocks in the market are not offering yields anywhere near 7%.

In addition, this large dividend is paid monthly.

Getting a near-7% yield is rare.

Getting that kind of income paid monthly?

Almost unheard of!

And that makes this stock somewhat special.

But there’s something else that’s special here.

Main Street Capital regularly declares special dividends.

That’s right.

The headline 6.7% yield is based on the regular dividends only.

These special dividends push the stock’s yield up to about 9% (based on special dividends declared this year), which is amazing.

Plus, this dividend is regularly increased.

In fact, Main Street Capital has increased its dividend for 14 consecutive years.

Not even the pandemic stopped this dividend growth train.

Furthermore, Main Street Capital has increased its dividend three times this year alone.

The ten-year dividend growth rate of 4.3% is more than enough to stay ahead of normal inflation and make that 9% all-in-yield even more compelling.

Based on the most recent quarter’s distributable net investment income of $1.04 per share, the monthly $0.24 per share dividend is easily covered and has a payout ratio of 69.2% on an annualized run rate.

For investors who want a large, growing dividend that’s paid monthly and regularly features special payouts on top of the ordinary payouts, this is about as good as one can do in the market.

Revenue and Earnings Growth

Main Street Capital is able to offer generous income to its shareholders because the underlying business is generating generous income.

Main Street Capital grew its revenue from $116.5 million in FY 2013 to $376.9 million in FY 2023.

That’s a compound annual growth rate of 13.9%.

Strong top-line growth here.

However, when assessing a BDC like this, the real measure of growth is net investment income (NII) or distributable net investment income (DNII) per share.

In this regard, Main Street Capital increased its DNII/share from $2.17 to $3.46 over this 10-year period, which is a CAGR of 5.3%.

That’s a truer measure of Main Street Capital’s growth profile, which slightly exceeds the rate at which the dividend has grown (building up a nice margin of safety in the dividend).

Still, I think a 5%+ growth rate, which outpaces inflation, is more than enough to get the job done when investors are starting off with a near-7% headline yield (and an actual yield that’s closer to 9%).

But where do we go from here?

Well, I think Main Street Capital is just getting started.

Because of increasing regulation and unfavorable market forces hitting banks hard and limiting traditional financing options, private equity and private credit are flourishing.

Indeed, Main Street Capital’s most recent quarter showed an 18% YOY increase in DNII/share.

Truly incredible performance.

While I wouldn’t necessarily build in expectations for that kind of growth to persist indefinitely, there’s nothing to indicate that Main Street Capital can’t grow at least as fast as it has been.

This adds up to a 9% all-in yield and mid-single-digit (or better) business and dividend growth.

You’d be challenged to find more base income that also comes with more growth.

It’s a very unusual package.

For income-oriented investors, you almost can’t do better than this.

Financial Position

Main Street Capital’s financial position is good.

Now, the balance sheet of a BDC is different from a normal company (because it’s in the business of providing financing).

Thus, the usual metrics don’t necessarily apply.

Perhaps the best way to gauge the financial position for a BDC is by looking at the net debt/NAV (net asset value) ratio.

We want to see this ratio below 1.

In Main Street Capital’s case this ratio is 0.8.

This company has an experienced management team with skin in the game, and this team has shown an ability to allocate capital and prudently manage leverage.

I don’t see anything worrisome here.


Profitability metrics also don’t correlate well with ordinary companies.

The best way to measure a BDC’s profitability is with return on equity.

Main Street Capital’s ROE has averaged 11.3% over the last five years.

That’s solid.

But it’s even better than it looks.

FY 2020, which was anomalous, artificially skews this average downward.

There’s also been a recent improvement in profitability, and Main Street Capital’s ROE is sitting at 18.2% for the TTM period ending with Q3 FY 2023.

Very impressive stuff.

Being able to produce high returns on capital speaks volumes about this management team and its capital allocation skills.

With that experienced and talented team in place, along with built-up scale and breadth, Main Street Capital does appear to have durable competitive advantages in place.


But there are risks to consider.

Competition, regulation, and litigation are omnipresent risks in every industry.

Private equity and private credit returns have been alluring in recent years, which may invite more competition in the future and make it more difficult for Main Street Capital to find opportunities and effectively compete.

Regulation could be a thorny issue in coming years, as BDCs have largely escaped the regulatory headaches that banks have had to deal with in recent years.

The BDC business model, by its very nature, is a risk, since Main Street Capital is in the business of lending money to and/or taking equity stakes in smaller, unproven businesses with limited liquidity and plenty of their own risks.

Main Street Capital has direct exposure to interest rates, and the BDC may actually suffer if/when rates fall, because approximately 70% of their debt investments bear interest at floating rates.

Some personnel risk is present, as any losses across the experienced management team may harm deal-making abilities.

So there are some risks, which is true for all equities.

Also, with the valuation as low as it is, a lot of risk is being priced in.


Now, there are two basic ways we can value a BDC.

First, we can look at price compared to NAV.

This is, essentially, a price-to-book ratio.

In the case of Main Street Capital, its most recent quarterly report showed NAV at $28.33 per share.

The stock is currently priced at around $43.

Based on that 1.5 price/NAV ratio, it looks expensive.

However, I’ve been investing for more than a decade now, and I can tell you that I’ve never seen Main Street Capital at or below NAV.

It’s always priced at a premium to NAV.

Indeed, the stock’s own five-year average P/B ratio is 1.6.

We’re in that range now.

Another way to value a BDC is to look at what kind of multiple of DNII shares are being priced at.

Based on the annualized run rate of $4.16 for DNII/share right now, the multiple is at 10.3.

That would be somewhat analogous to a forward P/E ratio on a normal stock, so we can see a very undemanding multiple here.

And the yield, as noted earlier, is slightly higher than its own recent historical average.

In order to estimate the intrinsic value of the business, I used a dividend discount model analysis.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

I factored in a 10% discount rate and a long-term dividend growth rate of 4%.

I’m assuming that Main Street Capital can continue to grow its dividend at a rate that’s similar to what it’s proven out over the last decade.

I wouldn’t expect any kind of material acceleration in growth, nor do I see any reason why Main Street Capital would suddenly struggle to maintain this level.

Now, this is all based on the regular dividend.

There are those special dividends, too.

And so this model doesn’t fully reflect the real value of the enterprise, but I’d also keep in mind that special dividends aren’t committed to in the same way that regular dividends are.

If there are any bumps in the road, management could quickly pull those special dividends without disrupting the flow of regular dividends.

Overall, I think this is a reasonable model for Main Street Capital.

The DDM analysis gives me a fair value of $49.92, which would indicate the stock is 14% undervalued.

Bottom line: Main Street Capital Corp. (MAIN) is a dividend income powerhouse, and it’s one of the very best high-yield dividend growth stocks out there. This BDC gives retail investors access to private equity and private credit, and its massive regular and special dividends can allow investors to get the bills paid without needing to sell off shares. The stock offers a 6.7% headline yield that quickly turns into a 9% yield after special dividends are considered, and the dividend is also growing. The stock currently looks 14% undervalued, which could mean this is one of the most attractive deals in the market for income seekers.

-Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.