Main Street Capital Just Raised Its Monthly Dividend Again. Is the 8% Yield Safe as Earnings Soften?

Main Street Capital (NYSE: MAIN) will make its latest monthly dividend payment this week. That payment will be 1.9% above last month's level (and 3.9% higher than the year-ago payment). It's the 12th dividend increase since the end of 2021.

When adding in the business development company's (BDC) recently paid supplemental quarterly dividend, its annualized yield is up over 8% at the recent share price. Here's a look at the safety of this high-yielding payout as its earnings soften.

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Earnings are softening while the dividend keeps rising

Main Street Capital reported its first-quarter earnings in early May. The BDC generated $90.8 million in distributable net investment income (DNII), or $1.00 per share. DNII is a good proxy for the dividends the company can afford to pay.

The concern with that number is two-fold. DNII is down from $1.09 per share in the fourth quarter and $1.02 per share in the year-ago period. That's due to higher total expenses and the impact of a 2.2% increase in its weighted-average shares outstanding resulting from equity issuances, dividend reinvestment plans, and equity compensation plans, partially offset by higher total investment income.

While earnings are falling, the dividend continues to rise. Main Street Capital's monthly dividend payment is up to $0.265 per share, while it has continued to maintain its supplemental quarterly payment of $0.30 per share. The combined quarterly outlay is now up to $1.095 per share, well above DNII.

Two different types of dividends

Main Street Capital has a unique dividend policy among BDCs. It set its monthly dividend payment at a level it can sustain. At the current level, the payment adds up to $0.795 per share each quarter, comfortably below its DNII. As a result of this strategy of setting the base monthly dividend at a lower level, Main Street Capital has never reduced its monthly dividend since its 2007 IPO. Instead, this base payment has grown by 141%.

The quarterly supplemental dividends are extra payments intended to ensure the BDC remains compliant with IRS regulations requiring it to distribute at least 90% of its taxable net income to shareholders. This supplemental payment can rise and fall based on its earnings. Main Street has currently made 19 consecutive supplemental quarterly payments, including maintaining the $0.30 per share rate since early 2023.

While this rate could fall in the future, Main Street Capital's management team currently expects to continue paying significant supplemental dividends, including another one in September. That's due to its expected strong performance in the second quarter, which included the profitable exit of an equity investment. The BDC realized a $46.4 million gain on a $6.4 million investment during the period. Gains on equity investments are a key driver of monthly dividend increases and supplemental dividend payments.

One dividend you can bank on, and another extra payment

Main Street Capital aims to provide investors with a sustainable and growing monthly dividend. It also offers the potential to collect a supplemental quarterly income stream when it has extra income to distribute. While its earnings have softened recently, a profitable equity investment exit in the second quarter should boost its DNII, enabling it to continue paying a significant supplemental quarterly dividend. That makes the more than 8% yield safe for now.

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.