If I Could Buy Only 1 High-Yield Dividend Stock for Passive Income in September, This Would Be It

Key Points

• Main Street Capital pays a bankable monthly dividend.

• The BDC also periodically pays supplemental quarterly dividends.

• The company offers additional upside potential from its equity investments.

• 10 stocks we like better than Main Street Capital ›

My primary financial goal is to build enough passive income streams to cover my basic living expenses. Achieving this milestone would enable me to be more financially independent. This strategy leads me to invest money each month to grow my passive income.

Investing in high-yielding dividend stocks is a core aspect of my strategy. I tend to buy several each month. However, if I could only buy one high-yield dividend stock this month, it would be Main Street Capital (NYSE: MAIN). Here's why it's my top passive income investment in September.

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A lucrative, growing monthly dividend

Main Street Capital is a business development company (BDC) that provides private debt and equity capital to lower-middle-market companies ($10 million–$150 million in annual revenue) and debt capital to middle-market companies (over $150 million in revenue). These investments generate recurring income.

The BDC distributes a portion of its income to investors each month through dividend payments. Main Street Capital sets its monthly dividend at a level it can sustain during more turbulent market conditions (currently 1.4 times its distributable net investment income). That enables it to provide investors with a recurring income stream they can count on each month.

Main Street Capital has never reduced or suspended its dividend payment since its initial public offering (IPO) in 2007. This bankability is a desirable feature for those seeking a durable passive income stream.

Main Street Capital currently pays $0.255 per share each month ($3.06 annually). That gives the BDC a 4.6% dividend yield, nearly four times higher than the S&P 500's (SNPINDEX: ^GSPC) 1.2% yield.

The BDC routinely increases its monthly dividend, aiming to grow it at a sustainable rate. Since its IPO, Main Street Capital has increased its payout by 132%, including by 4.1% over the past 12 months. This steadily rising payout provides its investors with a growing stream of passive income.

A bonus income stream

As a BDC, Main Street Capital must distribute 90% of its taxable net income to investors via dividends to remain compliant with IRS regulations. The company does this through a unique dividend policy. It pays the aforementioned conservative monthly dividend. Additionally, Main Street Capital periodically pays quarterly supplemental dividends from its excess income.

It recently declared a $0.30 per-share supplemental dividend payment that it will pay in September. The company has paid quarterly supplemental dividends at that rate for the past two years. This additional payment has pushed Main Street Capital's annualized dividend yield up to around 6.5%, even further above the S&P 500's level.

The company has historically paid supplemental dividends during healthy market conditions and pauses these payments during more challenging periods to preserve its financial flexibility. I see this additional dividend payment as a nice bonus income stream.

Additional upside potential

Another bonus Main Street Capital provides its investors is the potential for meaningful value growth. Most BDCs focus on making debt investments. While that provides them with a lucrative income stream to pay dividends, it caps their upside potential.

Main Street Capital, on the other hand, aims to be a one-stop capital solutions provider by offering its clients debt and equity capital. Those equity investments (30% of its lower-middle-market portfolio, and 5% of its middle-market investments) supply it with dividend income and upside potential as the value of its private equity investments increases.

These equity investments have enabled Main Street Capital to meaningfully grow its net asset value per share (151% since its IPO). That has provided investors with an additional return above the dividend income. Main Street can periodically harvest gains by selling its equity investments, which it can use to make additional investments. These investments have enabled the company to steadily increase its dividend payments.

Steadily rising income and a lot more

Main Street Capital is an ideal investment for my passive income strategy. It provides a very bankable monthly income stream that steadily rises. Additionally, it routinely pays a supplemental dividend, supplying even more passive income. To top it all off, the company's equity investments have helped steadily grow the value of its shares, providing additional upside potential beyond the lucrative income.

This combination of income and upside potential is why Main Street Capital is the high-yield dividend stock I'd buy if I could only purchase one this September.

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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.