Ares Capital Corp. (ARCC), a business development company (BDC), just raised its quarterly dividend — a move that always increases our interest, explains Ian Wyatt, editor of High Yield Wealth.
Ares Capital is the largest BDC in the field. It holds $12.3 billion in total assets. Its dividend is one the largest in the segment. The recent increase lifts the annual dividend to $1.56 per share. The increased dividend lifts the yield to 9%.
Ares Capital also has tenure on our recommendation list. We have continually recommended its shares since February 2011. We’ve experienced three dividend increases over that time. The macro backdrop points to more dividend increases.
Ares Capital Corp. invests primarily in first- and second-lien senior secured loans. These loans together accounted for 70% of Ares Capital’s investment portfolio. Ares maintains investments in 346 portfolio companies. The companies are well diversified geographically and by business segments.
Its capital structure and investment portfolio enable it to thrive in a rising-interest-rate environment. Seventy-eight percent of Ares Capital’s loans are floating rate.
Rising interest rates will allow Ares Capital to raise the interest rate it charges on its loans. On the other side of the balance sheet, the debt is mostly fixed. Indeed, over 99% of Ares Capital’s $4.6 billion in debt financing is fixed.
A stable debt structure combined with a floating-rate investment portfolio should produce a rising tide of net interest income. It already has. Ares Capital reported $0.38 per share in NII in the second quarter compared to $0.29 per share in the year-earlier quarter.
Ares Capital CEO Kipp deVeer offered an optimistic outlook at a meeting with analysts last week. Here’s deVeer in his own words: “We believe our future earnings are positioned to further benefit from additional increases in LIBOR . . . The growth in earnings has allowed us to increase our quarterly dividend of $0.39 per share. We feel well positioned to deliver attractive returns for shareholders moving forward.”
We agree with deVeer’s assessment. Ares Capital might be the most attractive high-yield investment on the market. Suggested Action: Buy Ares Capital Corp. shares up to $19.
