Main Street Capital Corporation (MAIN), Prospect Capital Corporation (PSEC): Two High-Yield Alternatives to BDC Stocks

Do you want high yields, but don’t want to take on the risk of investing in higher-risk business development companies? You may have a better option. Here are two BDC investment opportunities that offer an attractive middle ground with above-average yields.

Make this a mainstay
BDC investors love Main Street Capital Corporation (NYSE:MAIN) for its impressive track record. Not only did the company pay dividends throughout the financial crisis, but it also increased its dividends in every year except 2010. Few business development companies can match that claim.

Investors are seemingly so eager to invest in the company that shares now trade at 1.5 times book value. In essence, investors pay $1.50 for every $1 in its investment portfolio — most BDCs are lucky to trade at just a 10% premium to book value.

A high price-to-book ratio puts pressure on implied yields. If you buy today, you’ll theoretically earn a yield of just 6.4%, little more than half that of rival BDCs.

Main Street Capital Corporation (NYSE:MAIN)’s portfolio quality and history are certainly above par for the BDC universe. The BDC has a highly diversified portfolio of investments in 164 different companies, and only 0.7% of its investment portfolios is performing under expectations. But if a 6% dividend yield is all you want, there may be a better way to play the company.

A 6% yielding middle ground
Main Street Capital Corporation (NYSE:MAIN) recently raised $92 million by selling notes to the public under the name Main Street Capital. The notes yield 6.125%, paid quarterly, and at the current price of less than $24 per note, they yield 6.4% per year — the same as the stock. The notes will be redeemed at $25 per share in April 2023.

The notes may be a better risk-adjusted investment than the stock. Remember, notes have a claim to the balance sheet before shareholders, which means Main Street Capital Corporation (NYSE:MAIN) must pay distributions to note-holders before it doles out more to its equity investors.

While an earnings miss could send Main Street Capital Corporation (NYSE:MAIN)’s common stock dividend and share price plummeting, earnings would have to fall by more than 100% to affect payments to note-holders, making the high-yield notes a better alternative for risk-adverse investors.

A yield prospector’s choice
Like Main Street Capital Corporation (NYSE:MAIN), Prospect Capital Corporation (NASDAQ:PSEC) ranks high on the list of quality BDCs, thanks largely to its balance-sheet makeup. The company invests mostly in higher-quality senior debt of middle-market companies.