Ares Capital Corporation (NASDAQ: ARCC) is a business development company (BDC) that offers investors an enticing 9.72% dividend yield. With interest rates rising and the stock market volatile, ARCC’s stable high-yield dividend makes it an attractive option for income investors.
Overview of Ares Capital
Founded in 2004, Ares Capital specializes in providing debt financing to middle-market companies. The company focuses on investments in sectors like manufacturing, business services, healthcare, consumer products, and information technology services.
Specifically, Ares Capital provides:
- Acquisition financing
- Recapitalization
- Mezzanine debt
- Restructurings
- Rescue financing
- Leveraged buyouts
The fund prefers to invest in companies with $10 million to $250 million in EBITDA. It makes debt investments between $10 million and $100 million, with total investments ranging from $20 million to $400 million.
What Sets Ares Capital Apart
What makes ARCC stand out is its focus on high-quality sponsors and collateral. The company lends to profitable, established businesses with experienced management teams. It secures its financing with tangible assets and equity cushion from sponsors.
This careful lending approach has allowed Ares Capital to maintain exceptionally low loss rates. Over the past 10 years, the company has averaged annual net realized losses of just 0.2% of its portfolio. This has supported steady dividend growth over time.
ARCC’s Attractive 9.63% Dividend Yield
Ares Capital currently pays a quarterly dividend of $0.48 per share, which annualizes to $1.92 per share. At the current stock price $20, this equates to a 9.63% dividend yield.
The company has an excellent history of dividend growth. ARCC has increased its dividend each year since going public in 2004. Over the past 5 years, the dividend has grown at an 8.5% annualized rate.
Supported by rising portfolio income, the dividend appears secure with a reasonable 65% payout ratio. This leaves room for continued dividend growth ahead.
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How Ares Capital Generates Returns
Ares Capital generates income from the interest payments on its debt investments. The company structures investments creatively to maximize income and total returns:
- Senior Secured Loans – The most secure form of financing ARCC provides, backed by assets and/or cash flow.
- Second Lien Loans – Loans secured by a secondary priority lien on assets/cash flows.
- Mezzanine Debt – Unsecured, high-yield subordinated debt.
- Preferred & Common Equity – Generates returns through dividends and equity appreciation.
- Warrants & Equity Co-Investments – Provides added upside through options to acquire equity stakes.
This diverse “credit stack” allows Ares Capital to generate solid risk-adjusted returns across market cycles.
Financial Highlights
Ares Capital has a large and diverse investment portfolio, with over $20 billion invested across 490 companies, as of September 30, 2023. The company has significant scale, with a market cap over $8 billion.
Some key financial highlights:
- 9% average annual portfolio growth since 2004
- 8.4% average annual return on equity
- Stable 1.2x debt/equity ratio
- 86% of portfolio secures investment grade debt or higher
- Only 1.9% of investments on non-accrual status
With its size, diversification, and strict underwriting, Ares Capital is positioned to deliver stable returns to shareholders.
Why ARCC Belongs in a Dividend Portfolio
For dividend investors, Ares Capital offers an appealing mix of high current income and growth. Key advantages include:
- Massive 9.63% dividend yield – Nearly 3x the S&P 500 average.
- Steady dividend growth – Increased every year since IPO in 2004.
- Recession resiliency – Held dividend steady through Great Recession.
- Specialized lending focus – Expertise in high-yield middle market.
- Large diversified portfolio – Over 490 companies across industries.
In an uncertain market, Ares Capital’s big dividend and defensive business model make it a compelling investment. The stock deserves consideration from any investor seeking large, sustainable passive income.
Is ARCC a Buy Today?
Ares Capital appears attractively valued today for dividend investors. The stock trades significantly below its 5-year average price-to-book ratio.
Meanwhile, portfolio growth is driving increased investment income and dividends. Management sees strong deal momentum, with rising interest rates making ARCC’s financing more attractive.
Given its high yield, defensive qualities, and growth outlook, Ares Capital is a compelling dividend play in today’s volatile market. For income investors, ARCC deserves a close look.