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Did This 6.5% Yielder Keep Its Perfect Rating?

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Did This 6.5% Yielder Keep Its Perfect Rating?

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Last July, I reviewed Main Street Capital (NYSE: MAIN) for dividend safety. The company received an "A" rating. Now that more than a year has passed, is the dividend just as safe?

Main Street Capital is a business development company, or BDC. It invests in or lends money to privately held companies.

Its portfolio companies include...

  • IG Holdings, an 82-year-old company based in Providence, Rhode Island, that designs insignias
  • PPL RVs, which has been around since 1972
  • Willis Group, which provides staffing and recruitment services and is based in Houston.

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When we measure dividend safety for BDCs, we use a metric of cash flow called net interest income, or NII.

Main Street Capital's NII has been steadily rising for a number of years.

In 2024, NII rose 3% from $384 million to $395 million. This year, NII is projected to grow 11% to $438 million.

Chart: NII Is Heading in the Right Direction
View larger image
 

By law, BDCs must pay out 90% of their profits to shareholders in the form of dividends. NII is different from profits, but as a result of that law, BDCs often pay out all or nearly all of their NII in dividends.

For that reason, I'm comfortable with a payout ratio of 100% of NII or lower. If it's above 100%, the company isn't generating enough cash flow to pay the dividend. But as long as it's below 100%, that's okay.

With that in mind, let's check on Main Street's payout ratio to ensure it can afford its monthly dividend.

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