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Thursday, January 10, 2013 - 11:30
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Thursday, January 10, 2013 - 11:49
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Thursday, January 10, 2013 - 11:30

McDermott Strikes Twin Deals - Analyst Blog

Thursday, January 10, 2013 11:30 AM

There are lots of reasons why monthly dividend payers (MDPs) are so attractive for yield-starved investors.

After all, why should we settle for four quarterly dividend payments every year when we could just as easily get 12?

MDPs are perfect for investors who want a check in the mail every month. This steady source of income can be especially valuable for retirees, students or anyone trying to live on a fixed income.

By including MDPs in your portfolio, it's possible to start generating enough monthly income to cover bills for the mortgage, utilities or to start saving for a vacation.

MDPs can also increase your compounding rate. By reinvesting dividends, investors put every dollar back to work buying more shares. These in turn earn more dividends, creating a "snowball" effect.

By investing in an MDP paying a steady 5% and reinvesting dividends, your investment would more than double in 13 years. Said another way, $100,000 invested today would grow to $205, 577. And this is a conservative estimate, assuming 0% capital appreciation.

There are currently more than 300 investments that pay monthly dividends.

But I wouldn't recommend all of them. Many MDPs have seen their stock prices go nowhere over the last several years. Others have dividend track records that are spotty at best.

But today, one clearly stands head-and-shoulders above the rest…

This company has been in business since 2007, and has paid a steady monthly dividend since October 2009.

Right now it boasts a yield of nearly 6%.

The company has very little debt and has generated $37 million in free cash flow during the past year.

But what really makes Main Street Capital Corp. BDC (NYSE: MAIN) stand out is huge capital gains. Main Street Capital is business development company (BDC) that specializes in lower middle-market companies. It focuses on management buyouts, ownership transitions, recapitalizations and growth strategies for maturing businesses.

The stock is up 48% in the past year alone.

In the past three years, it's gained an incredible 82%.

Including dividends, every $1,000 invested three years ago would be worth $1,977 today.

The type of financing that Main Street provides has been very attractive for small businesses in recent years. In December 2012, the number of small bank loans to business fell to its lowest point in more than a decade, according to federal data. So there's been plenty of opportunity for BDCs like MAIN to fill the void.

As lenders, BDCs can be sensitive to inflation. But with Federal Reserve Chairman Ben Bernanke promising to keep interest rates low through 2015, MAIN should enjoy steady demand for its services as long as rates stay low.

I'm not the only one at StreetAuthority who's been following MAIN…

StreetAuthority analyst Amy Calistri added MAIN to her Daily Paycheck portfolio in February 2010. So far, her readers are up more than 158% on the position (including reinvested dividends).

Risks To Consider: One catch with BDCs is that outside investors can have a hard time figuring out what specific investments the company is involved in at any given time. Also, BDC dividends are generally taxed as ordinary income, so these stocks are best held in a tax-deferred account.

Action to Take --> In investing, there are never any guarantees. But Main Street's stellar track record proves it's an excellent company with smart management making good decisions. Look for MAIN to continue providing solid gains and consistent monthly dividends in the years ahead.

P.S. -- Stocks like MAIN are perfect for what Amy calls a "Dividend Trifecta" strategy. Simply put, it's a three-part approach to dividends that multiplies the effectiveness of every dollar you invest. The plan is specifically engineered for people who want to retire sooner or for those who would like to get a steady stream of extra income now. Go here to learn more...

Chad Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of MAIN in one or more of its “real money” portfolios.