Berkshire Hathaway’s legendary chairman Warren Buffett is well known for his love of dividends. Although his conglomerate doesn’t pay one itself, its portfolio is packed with dividend-paying stocks. Buffett discussed dividends at length in his latest letter to shareholders.
Most of Berkshire’s dividend holdings yield no more than 4-5%. But dig deep enough into the portfolio, and you’ll uncover a dividend gem yielding an ultra-high 10% – making it a screaming buy right now.
The Twist: This “Buffett Stock” Isn’t Technically His
You won’t find Ares Capital (NASDAQ: ARCC) listed directly among Berkshire Hathaway’s stock holdings. But it is effectively a Buffett stock nonetheless.
Ares Capital is held by New England Asset Management (NEAM), a Boston-based investment manager. Berkshire’s insurance subsidiary General Re acquired NEAM back in 1995. So when NEAM buys stocks for its insurance company clients, they become Buffett stocks by extension.
Why Buffett Likes Bank Stocks
Though not technically a bank, Ares Capital checks off the boxes that draw Buffett to bank stocks. Banks provide essential financial services while generating strong returns on equity. This business development company (BDC) does the same.
As the largest BDC, Ares Capital specializes in financing middle-market companies. These firms, with revenues of $10 million to $1 billion, are often ignored by banks. That lending niche is a big reason this “Buffett stock” is so compelling.
3 Reasons Ares Capital is a Screaming Buy
Beyond the Berkshire connection, Ares Capital has several other attributes that make it a top stock to buy now:
Massive 10% Dividend
Very few stocks in Berkshire’s portfolio yield over 5%. But Ares Capital’s dividend tops 10%. And it’s easily supported by the BDC’s recurring income. Ares has raised its payout for 13 consecutive years too.
Diversified Lending Portfolio
With $21.5 billion invested across 475 companies in 33 industries, Ares’ loan portfolio is highly diversified. Its focus on larger, more stable middle-market firms also limits risk. Past loss rates have compared very favorably to BDC industry averages.
Stellar Track Record
Since its 2004 IPO, Ares Capital has trounced the S&P 500’s total returns. It has also handily outperformed the broader market over the last three years. This demonstrates the BDC is very well managed.
Attractive Valuation Adds to Appeal
Besides its high yield, diversified lending business, and impressive returns, Ares Capital also looks undervalued. It trades at just 8 times forward earnings and 0.84 times book value.
Risks to Consider
Of course, no stock is risk-free. As a lender, Ares Capital is vulnerable to downturns. Its stock plunged during both the 2007-2009 financial crisis and the 2020 COVID-19 crash.
Rising interest rates could also limit Ares’ deal flow. And it has substantial debt maturing in 2026 that may have to be refinanced at higher rates.
However, Ares Capital has successfully navigated turbulent times before. As CEO Kipp DeVeer noted recently, the economy is outperforming expectations currently.
The Bottom Line
This top Buffett stock offers an enticing 10% dividend that looks sustainable. Ares Capital’s lending focus and diversified portfolio enable it to produce very consistent income to support that payout.
The BDC also has an exceptional track record of outperforming the market. And right now, its shares trade at a reasonable valuation.
Of course risks exist, as they do with any stock. But at current prices, Ares Capital appears to be a screaming buy for income investors – one that even Warren Buffett might gladly own outright if he could.