Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what is actually inside our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will talk a bit about the counter, why I had selected it and what lies ahead in the future.
In this post, I shall talk about one of the dividend generating company: Mainstreet Capital (ticker: MAIN).
Business Development Company
Mainstreet Capital is classified as a business development company, or BDC for short. BDCs are organisations that invest in small and medium, as well as distressed, companies by providing funding and managerial support. To avoid being taxed, BDCs have to distribute at least 90% of their income to shareholders, similar to real estate investment trusts (REITs). This explains why their dividend yields are higher than the rest.
BDCs are a unique feature in the United States, and not all BDCs are publicly traded. There are similarities between BDCs and venture capital/private equity firms, with the latter two open to only accredited and institutional investors. This means a retail investor can have venture capital/private equity play by getting listed BDCs.
Why Mainstreet Capital
If you were to look around the publicly traded BDCs, some were more or less similar to one another in terms of profile, portfolio and sector exposure. Mainstreet Capital is no different than the others, but I prefer their massive diversification in terms of regions across the United States, and different sectors and industries ranging from IT services to construction and engineering.
With the exception of 2020, the period between 2018 and 2022 had seen a year-on-year (YoY) growth of between 4% and 51% in Mainstreet Capital’s total investment income, and a YoY growth between 2% and 56% in its distributable net income. The slump of 2020 was not so significant for the investment and distributable net incomes, which were -9% and -11% respectively. Excluding interest costs, Mainstreet Capital is aiming to keep total operating expenses of average assets at 2% or lower.
Since late 2007, Mainstreet Capital’s monthly dividends were increasing slowly and steadily. Despite the periods of the Great Financial Crisis of 2008/2009 and the COVID pandemic slump in 2020/2021, the dividend payouts remained minimally constant throughout.
Bear in mind that conventional value investing principles may not hold for Mainstreet Capital. It has high gearing, which is common for BDCs since they are in the business of funding private enterprises, so for this case profitability and cash flow are the more important variables to look at.
What’s Next
The small and medium enterprise sector is relatively large in the United States, given its industrial and entrepreneurial might that powers the capitalistic economy. Investing into companies of this sector would have huge potential of returns, especially some, if not most, of these are usually seen as supporting the larger, listed/unlisted organisations as sub-contractors. Investing into Mainstreet Capital could ride on the advantages of the potential of small and medium companies.
Disclosure
Bought MAIN at:
USD 36.80 at Feb 2018
USD 38.40 at Oct 2018
USD 36.50 at Oct 2018
USD 40.50 at May 2019
USD 28.50 at Mar 2020
USD 20.30 at Mar 2020
USD 41.30 at Sep 2021
Reference:
https://www.investopedia.com/terms/b/bdc.asp
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