Ignore the vanilla mainstream media. Small business mojo is gaining steam. Main Street getting its groove back will directly benefit these two (7.2% and 8.8%) dividends.
The NFIB Small Business Optimism Index washed out in April alongside the stock market. Despair hit desperation levels not seen since December 2012. But the malaise has quickly given way to positivity.
Small biz sentiment has increased for two straight months and counting. Why the turnaround? Two letters: AI.
Shanell Camp, owner of Shaded by Shanell (an up-and-coming beauty brand) explained her excitement to me about ChatGPT, her “go to” resource for brainstorming, marketing help and more.
“I even named him Ace. We are in a full-blown work relationship. That is my best friend, my assistant, my email writer—everything. I use ChatGPT for a lot of stuff in the business and it’s very, very helpful.”
Shanell and Ace are a dynamic duo. Together they are successfully competing with giant beauty brands that have much deeper pockets.
My friend and co-author Tom Jacobs, founder of Sark, a mobile word game, is similarly smitten with GPT. “Brett, it’s the best marketer I’ve ever met,” Tom raved to me. “It’s like having an entire marketing department at my fingertips.”
In years past, small business owners like Shanell and Tom would have had to hire expensive humans who would deliver a fraction of the output of ChatGPT. These are salad days for owners who are embracing AI tools, and who can blame them for being so excited?
When small business owners are feeling good, they think big—and expand.
That expansion still requires capital. Maybe not as much for hiring humans, but for scaling, marketing, inventory and even ChatGPT Pro!
Where to get the cash? For years, small businesses have bypassed the difficult-to-borrow-from banks and raised capital from business development companies (BDCs).
So when small business cooks, BDC lending profits sizzle. And we have two menu favorites here at Contrarian Outlook. One is the biggest, steadiest lender; the other is the steadiest dividend grower. Let’s talk about both top-shelf favorites: Ares Capital (ARCC) and Main Street Capital (MAIN).
ARCC is the biggest BDC by far, with over $22 billion in assets. This scale brings it a steady stream of deal flow, which then helps management dictate favorable loan terms.
No wonder we lovingly call Ares our “BDC Bully” because its size lets it seize market share when others panic. That playbook paid off in 2020, and it’s working again today.
Yup, the private credit market is still growing, and ARCC is aggressively writing new loans at attractive yields. Last quarter, ARCC generated net investment income (NII) of $0.50 per share, covering its $0.48 quarterly dividend.
Better still, ARCC is picky. Loans where borrowers aren’t paying are just 1.5% of the portfolio. That’s a healthy number for a lender in this “middle-market” credit space (companies with sales between $10 million and $1 billion)—industry average is 2.6%.
ARCC yields 8.8%, and the payout is supported by current income. That’s a rare combo of yield and quality in this market. We’ll keep collecting from this bully.
MAIN, our other favorite, is never cheap. It always trades at a premium to its book value in a world where many lesser BDCs trade at discounts. Most of those stocks are cheap for a reason, however. MAIN has absolutely manhandled the industry benchmark VanEck BDC Income ETF (BIZD) since the latter’s inception:
The MAIN BDC to Own
MAIN invests by lending money and providing equity capital (think of it as both lender and part-owner) to smaller, growing companies. These are typically private businesses that aren’t huge but big enough to be stable and profitable.
Specifically, MAIN looks for companies between $25 million and $500 million in annual revenues, with profits (EBITDA, a good measure of core earnings) ranging from about $7.5 million to $50 million. Think of a thriving regional manufacturer, a specialty healthcare provider, or a niche business-services firm—companies that are successful but still have plenty of runway for growth.
MAIN also provides straightforward loans to slightly larger “middle-market” firms and even manages assets and offers advisory services, rounding out its approach to creating income from solid, Main Street businesses (sorry, couldn’t resist!).
Its portfolio is impressively diverse. Right now, MAIN holds investments across 190 different companies. What’s reassuring is that its largest holding makes up just 3.8% of the portfolio—so no single company can overly sway MAIN’s performance. (In fact, most investments are less than 1%!) Even better, these holdings span dozens of industries, and MAIN doesn’t let any one industry dominate (none tops 10% of its investments). It’s exactly the kind of broad diversification that helps manage potential portfolio heartburn.
This lender and part-owner often increases its monthly dividend and quarterly “supplemental” payout. In 2009, MAIN paid total dividends of $1.50 per share. Fast forward to last year and the company distributed $4.11 per share—$2.91 in regularly monthly dividends and $1.20 in supplemental dividends—good for a 174% increase in 15 years:
MAIN currently pays a generous 7.2%, with the majority (about 5.5%) delivered through dependable monthly payments. Even nicer are the regular “supplemental” dividends it dishes out quarterly—think of these as extra rewards for shareholders, per this pretty payout picture:
We have two top-shelf picks here at Contrarian Outlook—one is the biggest and most reliable lender, the other the steadiest dividend grower. Why choose? Let’s own both BDC GOATs.
MAIN and ARCC yield a blended 8.1% today. And based on Main Street’s mood, those dividends aren’t just secure—they’re likely to grow. I think Ace would approve—as would our small business owner friends.
MAIN pays monthly while ARCC “only” dishes its dividend quarterly. If you prefer monthly dividends, there are plenty of payers yielding 8%+ that are attractive buys today—click here for my favorites.