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Main Street Capital (NYSE: MAIN) completed its initial public offering on Oct. 4, 2007, at $15 per share. If you invested $10,000 into the business development company (BDC) stock at its IPO, you’d have purchased around 667 shares. Those shares would now generate around $177 per month in regular dividend income alone at the current rate of $0.265 per share. You’d also currently collect another $200 each quarter in supplemental dividends at the current $0.30 per share rate.

Here’s a look at Main Street Capital’s impressive dividend track record.

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An income-producing machine

As a BDC, Main Street Capital must distribute 90% of its taxable income to shareholders each year to remain compliant with IRS regulations. It has a unique strategy to meet that obligation while also providing income investors with the stability they desire. It has set its monthly dividend at a level it can sustain throughout market cycles. Main Street Capital currently generates enough distributable net investment income to cover its regular monthly dividend by a comfortable 1.39 times. The BDC pays supplemental quarterly dividends to return excess taxable income to shareholders and remain compliant.

Main Street Capital has grown its monthly dividend by 141% since its IPO. It has paid a cumulative $42.465 per share in regular monthly dividends during that period, and an additional $8.74 per share in supplemental dividends. It has never suspended or reduced its regular dividend, though it has at times stopped paying supplemental dividends.

What’s driving the dividend growth?

Main Street Capital stands out from other BDCs for its growth. The company has grown its net asset value (NAV) per share from $12.85 at its IPO to $33.92 at the end of the second quarter, 164% total growth (5.4% compound annual growth rate). One of the keys to its success is its dual investment strategy of investing in the secured debt of smaller private companies with meaningful equity participation. The company’s equity investments provide upside.

For example, this past June, Main Street announced the exit of a portfolio investment. Its initial investment consisted of a $2.4 million revolving line of credit, a $12.2 million first-lien senior secured loan, and a $5.8 million direct equity investment. It subsequently completed seven follow-on investments, growing its total debt and equity investments to $42.3 million and $6.4 million, respectively. The BDC recently realized a $46.4 million gain on its equity investment in this portfolio holding, which had also generated $2.2 million in cumulative dividend income. Gains like these have supported its growing NAV per share while providing the BDC with additional capital to reinvest to grow its portfolio. That portfolio growth has helped support its rising dividend.

An excellent income investment

Main Street Capital has a terrific record of paying dividends. It has steadily grown its monthly payout, driven largely by the value created by its equity investments. It has also paid out additional cash each quarter in supplemental dividends (20 consecutive quarters of payments). While that supplemental payment isn’t as bankable as the regular dividend, the company expects to continue paying them for the foreseeable future. There’s also no guarantee its equity investments will continue to support its growing monthly dividend. However, it has a strong track record of making value-enhancing equity investments. That should give investors confidence that Main Street Capital can continue to deliver a growing monthly dividend, with an additional quarterly income bonus, making it an ideal passive-income investment.

Should you buy stock in Main Street Capital right now?

Before you buy stock in Main Street Capital, consider this:

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Matt DiLallo has positions in Main Street Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Main Street Capital Went Public at $15 a Share. $10,000 Invested Then Now Collects About $177 a Month in Regular Dividends. was originally published by The Motley Fool

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