Historically low interest rates have caused investors to seek higher yielding opportunities. Stocks with high yields provide current income and a cushion against capital depreciation. Dividend stocks tend to have strong financial positions to finance the period payments. I have been utilizing a dividend capturing technique for the past few years in an attempt to generate income as well as identify undervalued dividend stocks. For details of the strategy and my screener details, please consult my methodology on the topic (last modified 1/6/2013). In brief, the screen focuses on relative stable equities with a concentration on liquid companies at affordable valuations. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- P/E Ratio: 0-20
- Institutional Ownership ≥ 15%
- Ideally Modest YTD S&P 500 Underperformance
- Minimal European Exposure
After applying this screen I arrived at the equity discussed below. Although I envision this as a short-term (i.e. less than three month holding period) trading idea, you still need to exercise caution. Depending on the quality of the equity you may decide to just hold long enough for the dividend or make the stock a longer-term holding. The information presented below should simply be a starting point for further research in consultation with your professional financial advisor before making an investment decisions. My goal is to present new companies to you and provide a brief overview of their recent developments; this should not be considered a substitute for your own due diligence.
Main Street Capital Corp (MAIN): 5.72% Yield - Ex-Dividend 1/16
Main Street Capital is a business development company ("BDC") that specializes in equity, equity related, and debt investments in companies with revenue between $10M and $100M. Unlike some private equity firms, Main Street avoids start-up companies or those with "speculative business plans", instead preferring to "invest in traditional or basic businesses." For additional details on Main Street's investment criteria, please review their investment factors. The company can afford to pay the above-average yield as its mezzanine loans often have yields in excess of twelve percent. The portfolio of investments is available here and spans virtually all industries, providing sufficient diversification. In the past month alone the company has invested in a drilling equipment leasing company, a sophisticated generator company, and a corrosion prevention firm.
2012 was a very good year for Main Street as net asset value jumped 36% through September 30, 2012. NAV per share stands at $17.49 indicating a price-to-book ratio of 1.81. This increase in NAV was fueled by higher non-controlling/non-affiliate investments that resulted in net investment income increasing by 50% in nine short months. Realized and unrealized investment activity both showed substantial improvement over the comparable 2011 period. I scanned the portfolio and the vast majority of investments have lifetime gains. From a cash flow standpoint, Main Street continues to generate positive cash from operating activities. Main Street has been active in raising equity capital to finance investment purchases and repay borrowings against its credit facility. Main Street pays approximately 2.7% on its active credit facility and 0.375% on the unused portion. In December Main Street completed a $77.1M stock issuance at a price of $28 with proceeds used to reduce debt as well as invest in new opportunities.
Main Street has been steadily appreciating since June and the stock has climbed 60% in the past year due to the significant growth described above. The stock's outperformance has pushed the yield down from seven percent to below six percent despite the dividend exhibiting slight growth since 2008. Net assets from operations increased $.85 per share in the first nine months of 2012 while dividends increased by only $.10. The payout ratio is currently below 50% so there is a possibility for notable dividend increases in the future. Main Street is treated as a regulated investment company ("RIC"), thus it does not have federal tax obligations if it distributes at least 90% of its investment company taxable income. There are other complexities involved with RIC ownership so I suggest consulting a tax advisor before considering an investment. Note that the dividend is distributed monthly.
Main Street is similar to a Prospect Capital Corporation (PSEC), a private equity firm that I have written about in the past. I prefer to invest in Prospect over Main Street due to Prospect's size (market capitalization of $2.3B vs. $1B), relative valuation (forward P/E of 9.0 vs. 15.4), and yield (11.7% vs. 5.7%). Additionally, Main Street relies on debt financing to a greater degree than Prospect so there are additional financing risks to consider. Prospect has also underperformed Main Street recently so there is less downside in Prospect relative to Main Street. While I do prefer Prospect Capital, I believe that Main Street is a decent ex-dividend capturing opportunity based upon its strong recent growth.
The information presented has been summarized below. I make no warranties regarding the information in the chart as industry classifications are frequently imperfect. Yellow and red represent "avoid" and "consider" classifications, respectively.
Please refer to profile page for disclaimers.
Disclosure: I am long PSEC.