SVB Financial Group. Signature Bank. First Republic Bank. Credit Suisse. The number of banks that have experienced problems so far in 2023 has wreaked havoc in the banking industry.
It's not just banks that have been negatively affected. However, some businesses might actually benefit from the turmoil. Here's why the banking crisis could be good news for Warren Buffett's highest-yielding dividend stock.
Buffett's highest-yielding stock
If you only look at Berkshire Hathaway's (BRK.A 0.91%) (BRK.B 1.21%) regulatory filings, you might think that Buffett's highest-yielding dividend stock is US Bancorp. The regional bank's dividend yield currently tops 5.4%.
We'd have a hard time making a strong case that the banking crisis is good news for US Bancorp's business. It certainly hasn't been good for the company's share price, which has plunged nearly 20% year to date.
However, US Bancorp is not Buffett's highest-yielding dividend stock. To find the stock worth of that distinction, we have to look beyond Berkshire's direct holdings to one of the conglomerate's subsidiaries. New England Asset Management has been part of Berkshire Hathaway since 1998. It's an investment firm that owns many stocks that aren't in Berkshire's portfolio.
Those stocks include Ares Capital (ARCC 0.73%). With a dividend yield of 10.8%, Ares ranks as Buffett's highest-yielding stock. The stock's total return has absolutely trounced the S&P 500 since Ares' initial public offering in 2004 as well as over the last five years. And while Ares' shares took a hit recently as a result of the banking crisis, investors could have sold the stock too quickly.
Why the banking crisis could help Ares Capital
Ares Capital is a business development company (BDC) -- a specialty finance company that's a type of closed-end fund. BDCs typically invest in small- and medium-sized businesses through direct lending or buying equity. Like a real estate investment trust (REIT), BDCs must distribute at least 90% of their income to shareholders as dividends to avoid paying federal taxes.
Before Silicon Valley Bank failed and the banking crisis unfolded, Ares Capital CEO Kipp deVeer made some comments that are worth noting. At the Bank of America Financial Services Conference on Feb. 15, 2023, deVeer stated that his company gains market share "during periods of bank weakness."
That makes sense if you think about it. When there's fear in the banking world, banks tend to tighten access to credit. This causes small- and medium-sized businesses to have to look elsewhere to raise capital in many cases. BDCs offer an attractive alternative.
In addition, deVeer pointed out that the biggest BDCs benefit the most when this happens. Again, this makes sense because larger companies have greater financial flexibility to provide loans. Ares Capital is the biggest publicly traded BDC in the U.S. based on market cap. Its investments total $21.8 billion, with 466 companies in its portfolio.
Buy on the dip?
Ares Capital's shares are down more than 10% below where they were earlier this year before the banking problems surfaced. This sell-off appears to be a case of throwing the baby out with the bathwater.
My view is that aggressive investors could find Ares Capital an attractive stock to buy on the dip. Income investors could also take advantage of an opportunity to lock in an especially juicy dividend yield.
This stock isn't for everyone, though. Ares Capital could experience more defaults if there's an economic downturn. Its shares could also be highly volatile with uncertainty in the air.
While Ares Capital is a financial services stock, it doesn't face the same issues that banks do. I believe that the company's CEO is correct that it could benefit from weakness in the banking industry.
