Ares Capital Corporation (NASDAQ: ARCC) offers an attractive dividend yield of 8.7%, far exceeding the average yield of the S&P 500 index. This makes it a compelling option for investors seeking steady income through dividends.
Ares Capital operates as a business development company (BDC), focusing on lending to mid-sized companies with earnings between $10 million and $250 million. These companies often struggle to secure loans from traditional banks, which have reduced their lending to this segment due to tighter regulations and a preference for larger, less risky borrowers.
As the largest BDC in the U.S., Ares Capital is well-positioned to benefit from the growing market for private capital lending. The company primarily issues floating-rate loans, which adjust with interest rate changes, allowing its income—and potentially its dividends—to rise when rates increase.
Despite these strengths, investors should be cautious. Mid-sized companies can face financial challenges, especially amid economic uncertainties like inflation, tariffs, and supply chain issues. Credit quality is a key factor to watch. Currently, only 0.9% of Ares Capital’s loans are non-accrual, meaning they are overdue or doubtful, which is a slight improvement from the previous quarter.
Ares mitigates risk by investing mostly in senior secured loans, which give it priority in repayment if a borrower defaults. Its portfolio is diversified across 566 companies, with no single investment exceeding 2% of the total, reducing exposure to any one borrower.
Since its founding in 2004, Ares Capital has delivered an annualized total return of 12.9%, including dividends, outperforming the S&P 500 over the same period. The company has invested $160 billion to date and targets a large $5.4 trillion market, benefiting from a long-term shift toward alternative lending.
However, some analysts suggest there may be better stock options available for investors seeking growth and income. The Motley Fool’s Stock Advisor, for example, recently highlighted ten stocks with potentially higher returns than Ares Capital.
In summary, Ares Capital offers a high dividend yield and a solid track record in a niche lending market. But investors should weigh the risks associated with mid-sized company lending and consider other opportunities before investing at current prices below $22.50.
Key Points:
- Ares Capital yields 8.7%, much higher than the S&P 500 average.
- It lends to mid-sized companies underserved by banks.
- Uses floating-rate loans to benefit from rising interest rates.
- Credit quality remains stable with low non-accrual loans.
- Diversified portfolio reduces risk exposure.
- Strong historical returns but market volatility and economic risks persist.
- Alternative stock picks may offer better growth potential.
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