Main Street Capital (MAIN) usually sports the lowest yield and largest premium to NAV. Investors ask me why I recommend Main Street Capital with such a low yield compared to other BDCs and why I am willing to pay such a premium for the shares.

As a start, based on its regular monthly dividend, Main Street Capital yields 5.1%. However, Main Street Capital pays a supplemental dividend every quarter that is often equal to or greater than the monthly dividend, so investors get 16 dividends per year. Most BDCs yield from the high single digits to the low double digits.

A recent press release further illustrates why Main Street Capital is the best BDC out there. As of its third quarter earnings report, Main Street Capital had a net asset value of $30.57. Based on the current $58.36 share price, the stock is trading at a 91% premium to NAV.

Investors think that buying a BDC at a premium is not a good idea; they are wrong. Main Street Capital can issue shares that are immediately accretive to current shareholders. Think of it this way: Main Street Capital receives $191 for issuing $100 of new stock. BDCs can only carry a limited amount of debt, so issuing equity at a premium is a considerable advantage compared to BDCs trading at a discount.

Another differentiator for Main Street Capital is its practice of taking equity stakes in its client companies. Most BDCs primarily lend money to client companies. A recent press release shows how Main Street Capital’s investments can generate significant returns.

Last week, Main Street Capital announced that it had exited an equity investment in Pearl Meyer & Partners, LLC. In April 2020, Main Street Capital loaned Perl Meyer $35.0 million as a first-lien, senior secured term loan, and made a $13.0 million equity investment. As Pearl Meyer grew, Main Street Capital provided additional funding, so the term loan grew to $78.2 million.

On the exit, the term loan was paid off, and Main Street Capital received $53.7 million for its equity stake. The company also received dividends of $31.6 million on the equity position. The $13.0 million equity investment returned $85.3 million in four years, plus the interest earned from the $78.2 million term loan.

Wow! Main Street Capital is very shrewd with its equity investing, and this deal illustrates how it pays off for investors. With dividend reinvestment, MAIN has returned 305%, or 14.2% annually, since I added it to my Dividend Hunter portfolio in July 2014.