Business Development Companies – or BDCs, for short – can be a great source of current yield for income investors.

With that said, BDCs are often ignored by investors because of their small size and confusion about the tax implications of their distributions.

BDCs cause a bit more work come tax time. Their distributions are a mix of return of capital, capital gains, qualified dividends, and non-qualified dividends. Even after accounting for this, BDCs can be a great source of income for retirees and other income-oriented investors.

Main Street Capital Corporation (MAIN) is a fine example of this. This BDC has a current dividend yield of 6.2% – which makes it a member of the exclusive list of stocks with 5%+ dividend yields. You can see the comprehensive list of established stocks with 5%+ dividend yields here.

Better yet, Main Street Capital Corporation pays monthly dividends (instead of quarterly like most investment vehicles). There are very few companies that pay monthly dividends, and MAIN is one of them.

Main Street Capital Corporation’s high dividend yield and monthly payments make it a solid choice for income investors at the security level. But what about the strength of the underlying business?

Fortunately for investors, the Main Street Capital Corporation business appears to be thriving.

This article will discuss the investment prospects of Main Street Capital Corporation in detail.

Business Overview

Main Street Capital Corporation operates as a debt and equity investor for lower middle market companies (those with $5-$50 million of annual revenues) seeking to transform their capital structures.

The BDC has the capability to invest in both debt and equity, which gives it a significant advantage over companies who invest in private debt or private equity alone (but not both).

Main Street Capital Corporation also invests in the private debt of middle market companies (not lower middle market companies) and has a budding asset management advisory business.

Source: Main Street Capital Corporation Investor Presentation, slide 4

The BDC’s corporate structure is rather simple.

Main Street Capital Corporation (owned by public investors like you and I) operates three funds:

Since Main Street Capital Corporation is the operator of its own investment funds, management fees are kept to a minimum, which gives it a cost-based competitive advantage over its competitors who outsource their fund management.

Source: Main Street Capital Corporation Investor Presentation, slide 16

Main Street Capital Corporation’s holdings are highly diversified by both transaction type and geography.

By transaction type, the BDC acquires most of its deals via recapitalization and leveraged buyouts.

By geography, the southwest United States has a 29% weight in the portfolio, the largest of any geography reported by Main Street Capital Corporation. This makes sense because this business development company is headquartered in Houston, Texas. The Central United States has a similar weighting (24%) while other regions are under-represented in comparison.

Source: Main Street Capital Corporation Investor Presentation, slide 23

Main Street Capital Corporation also has a very high degree of diversification by industry. The largest industry representation in the BDC’s investment portfolio comes from Energy Equipment & Services at 8%, closely followed by Hotels, Restaurants & Leisure at 7%.

Source: Main Street Capital Corporation Investor Presentation, slide 22

Growth Prospects

Main Street Capital Corporation’s growth prospects come from its unique strategy to driving investment returns.

Investors who own MAIN are rewarded in three ways. First, the BDC sustains its high monthly dividend and grows it over time.