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Ares Capital (ARCC) Stock in Focus on 10.5% Dividend Yield

In this current backdrop, when the financial sector is facing turmoil due to the regional banking crisis and expectations of economic slowdown/recession in the near term, solid dividend-yielding stocks should be on investors’ radar. Today, we are discussing one such stock – Ares Capital Corporation ARCC.

This Los Angeles, CA-based business development company primarily invests in U.S. middle-market firms, having annual earnings in the range of $10-$250 million. ARCC offers customized financing solutions, ranging from senior-debt instruments to equity capital, with a focus on senior secured debt.

The company is treated as a regulated investment company (RIC) for income-tax purposes. To maintain its RIC status, it distributes almost 90% of its taxable income. In October 2022, Ares Capital raised its dividend by 11.6% to 48 cents per share. In the past five years, the company increased its dividend six times, with an annualized dividend growth rate of 3.36%.

Considering last day’s closing price of $18.25, the company’s dividend yield currently stands at 10.25%. This is attractive for income investors as it represents a steady income stream.

Ares Capital Corporation Dividend Yield (TTM)

Ares Capital Corporation Dividend Yield (TTM)
Ares Capital Corporation Dividend Yield (TTM)

Ares Capital Corporation dividend-yield-ttm | Ares Capital Corporation Quote

Should you keep an eye on Ares Capital stock to earn a high dividend yield? Let’s check out the company fundamentals to understand risk and rewards. This will help us make a proper investment decision.

Apart from regular quarterly dividend payouts, ARCC has a steady share repurchase program in place. In April, the company announced an increase in its share repurchase authorization. It now has the authorization to buy back up to $1 billion worth of shares, rising from the prior plan of up to $500 million.

Ares Capital has been witnessing steady growth in total investment income. While the same declined in 2020, it recorded a three-year (2019-2022) CAGR of 11.1%. The increase was primarily driven by the acquisition of American Capital, which boosted investment income substantially.

ARCC is expected to continue to witness a rise in investment income in the quarters ahead, given the regulatory changes and rising demand for customized financing amid the challenging macroeconomic backdrop. Our estimates for total investment income suggest a CAGR of 4.3% by 2025.

Additionally, we are encouraged by the company’s concentrated focus on its credit performance. In 2022, 2021, 2020 and 2019, the company originated $9.9 billion, $15.6 billion, $6.7 billion and $7.3 billion, respectively, in gross investment commitments to new and existing portfolio companies. Driven by the rise in demand for customized financing, the company is likely to continue witnessing a steady rise in investment commitments.

The fair value of Ares Capital’s portfolio investments was $21.14 billion as of Mar 31, 2023. The fair value of accruing debt and other income-producing securities was $18.83 billion. As of the same date, the net asset value was $18.45 per share.

Though the near-term challenges and rising expenses are headwinds, ARCC will keep witnessing robust loan origination volume going forward. This will support its financials.

Over the past three months, shares of Ares Capital have lost 7.6% compared with the industry’s fall of 8.1%.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Therefore, income investors must watch this Zacks Rank #3 (Hold) stock as this will help generate robust returns over time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Finance Stocks Worth Considering

A couple of other finance stocks, like Associated Banc-Corp ASB and Invesco Ltd. IVZ, are worth a look as these have robust dividend yields.

Considering the last day’s closing price, Associated Banc-Corp’s dividend yield currently stands at 5.71%. Over the past six months, the shares of ASB have lost 37.3%.

Based on the last day’s closing price, Invesco’s dividend yield currently stands at 5.26%. Over the past six months, the shares of IVZ have lost 19%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Invesco Ltd. (IVZ) : Free Stock Analysis Report

Ares Capital Corporation (ARCC) : Free Stock Analysis Report

Associated Banc-Corp (ASB) : Free Stock Analysis Report

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