The advice of Main Street Capital Corporation (NYSE: MAIN) announced that it will pay its dividend of $0.215 on September 15, an up payment from last year’s comparable dividend. This will bring the annual payout to 5.9% of the share price, which is higher than most companies in the industry pay.

Main Street Capital’s payout has strong revenue coverage

Impressive dividend yields are good, but that doesn’t matter much if payouts can’t be sustained. Main Street Capital is fairly easily earning enough to cover the dividend, but it’s been let down by weak cash flow. In general, we consider cash flow to be more important than earnings, so we would be cautious before relying on the sustainability of this dividend.

Over the next year, EPS is expected to fall 6.5%. If recent dividend trends continue, we could see the payout ratio reach 86% in the next 12 months, which is at the upper end of the range that we would say is sustainable.

NYSE: MAIN Dividend History August 6, 2022

Dividend volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the past 10 years. The dividend has gone from an annual total of $1.62 in 2012 to the most recent total annual payment of $2.66. This equates to a compound annual growth rate (CAGR) of approximately 5.1% per year during this period. A reasonable rate of dividend growth is good to see, but we are concerned that the dividend track record is not as strong as we would like, having been cut at least once.

Dividend growth can be hard to achieve

Since the dividend has been reduced in the past, we need to check if earnings are increasing and if this could lead to higher dividends in the future. Revenues have grown by about 3.1% per year over the past five years, which isn’t huge, but it’s still better than seeing them decline. Earnings growth is slow, but on the positive side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

Our thoughts on the Main Street Capital dividend

In summary, while it’s always good to see the dividend increase, we don’t think Main Street Capital’s payouts are strong. Although the low payout ratio is a redeeming feature, this is offset by the minimum cash to cover payouts. We don’t think Main Street Capital is a great stock to add to your portfolio if income is your priority.

It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic policy. Meanwhile, despite the importance of dividend payouts, these are not the only factors our readers should be aware of when evaluating a company. For example, we have identified 6 warning signs for Main Street Capital (2 are a little nasty!) that you should be aware of before investing. If you are a dividend investor, you can also consult our curated list of high yielding dividend stocks.

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