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Should You Continue Buy & Hold Investing?

How many people do you know who have achieved great wealth by holding their stocks for long periods of time?  There are a number of these investors who achieved staggering success such as Warren Buffett.  However, there are numerous reasons why I prefer income investing including covered calls to buy and hold.

“If anything, buy and hold is a completely reckless and irresponsible strategy.  This is why I have always preached ‘buy and homework.’  There is nothing wrong with buying a stock with the intention of owning it for years, as long as you are willing to check up on that stock every week to make sure that your investing thesis for owning it has not fallen apart.”  Jim Cramer (2007)

This is good advice from Cramer.  I can add more rationale why I prefer income investing to buy and hold investing:

1 – Stocks don’t always go up
As evidence from the last decade, stock returns can be volatile.  Over the last 10 years of the 2000 – 2010 decade, the S&P return was flat.  if you incorporate income investing into your strategy, you are still getting that money as a return that can be reinvested for more compounding.

2- Buy and hold doesn’t produce income
Stocks just lying around the portfolio produce no cash to you except for dividends assuming the stock pays a dividend.  Growth stocks may or may not be ome runs.  Do you really want to tie-up your capital in an investment that doen’s produce cash flow to you?  You can improve your cash return by investing in monthly dividend payers and writing calls against stock that you already own.

3- Is your timing right?
To make nice returns with buy and hold, you must be in the right stocks at the right time.  You must find the stocks that will appreciate in value and buy them at the right time to get a good price.  This requires a timing element in the stock market.  What if you found a stock just before the economic crisis of 2008?  You would have the right stock at the wrong time and lost money in the process.

If you prefer to hold a portion of long-term stocks in your portfolio, then you should consider writing calls against these stocks to generate additional income.  Of course, you can add some monthly dividend ETFs to your portfolio to add more income and diversification.

Monthly Income from Main Street Capital

Main Street Capital (MAIN) is a business development company that pays a monthly dividend.  It currently has a dividend yield of 8.52% by paying a $0.13 dividend per month.  MAIN has a market cap of $350 million.  There is room for significant growth as MAIN offers more financing to companys between $10-100 million.  The ROE is 20.7% for this stock.

MAIN just completed a successful common stock offering with net proceeds of $70.5 million.  This money will be used to repay outstanding debt borrowed under its $100 million credit facility, to make investments in accordance with its investment objective and strategies, to make investments in marketable securities and idle funds investments, which may include investments in intermediate term bank debt, rated debt securities and other income producing investments, to pay operating expenses and other cash obligations and for general corporate purposes.

MAIN has a trailing PE of 7.63 which is cheap for a monthly dividend with a small capitalization.  MAIN’s PE ratio is among the lowest of any stock in the Investment Services industry and signals that investors have not been willing to pay a premium for this company’s business prospects. Additionally, during the past year, earnings growth has outpaced its historical five year growth rate.

MAIN business summary:

Main Street Capital Corporation (MSCC) is a principal investment firm focused on providing customized financing solutions to lower middle-market companies with annual revenues between $10 million and $100 million. The Company was formed for the purpose of acquiring 100% of the equity interests of Main Street Mezzanine Fund, LP (MSMF) and its general partner, Main Street Mezzanine Management, LLC (MSMF GP); acquiring 100% of the equity interests of Main Street Capital Partners, LLC (the Investment Manager); raising capital in an initial public offering (IPO), which was completed in October 2007, and thereafter operating as an internally managed business development company (BDC). MSMF is licensed as a Small Business Investment Company (SBIC) by the United States Small Business Administration (SBA) and the Investment Manager acts as MSMF’s manager and investment adviser. The Company invests primarily in secured debt instruments, equity investments, warrants and other securities.

On 3/10/2011, MAIN reported 4th quarter 2010 earnings of $0.19 per share. This result missed the $0.27 consensus expectations of the 4 analysts following the company and missed last year’s 4th quarter results by 17.39%.  The next earnings announcement is expected on 05/02/2011.  However, Q1 2011 earnings are expected to $0.34 per share.  For the year, earnings are expected to be above the dividend payout which lessens the chance of a dividend cut.  MAIN has a 5-year sales growth rate of 37%

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