Warren Buffett and dividend stocks go together like macaroni and cheese. OK, maybe that's not the best comparison, but it's definitely true that the legendary investor's returns wouldn't be nearly as good without the dividends his stocks have generated through the years.
But Buffett isn't really known to target ultra-high-yield dividend stocks. That doesn't mean he doesn't own any of them, though. This Buffett dividend stock boasts a sizzling 9.9% yield and has trounced the market in total returns over the last three years.
A different kind of Buffett stock
The stock I'm referring to is Ares Capital (ARCC 0.73%). Let me note right out of the gate, however, that it's certainly a different kind of Buffett stock.
Buffett didn't personally choose to invest in Ares Capital. It wasn't his longtime business partner Charlie Munger or one of the two investment managers at Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), either.
Instead, Ares Capital is one of the stocks owned by New England Asset Management (NEAM). You might not have heard of NEAM, but it's been a wholly owned subsidiary of Berkshire Hathaway since the giant conglomerate acquired General Re in 1998.
Ares Capital ranks as the largest publicly traded business development company (BDC). It provides financing to middle-market businesses that banks sometimes shun.
Excelling on multiple fronts
BDCs, like real estate investment trusts (REITs), must return at least 90% of their taxable income to shareholders in the form of dividends. There's a risk, though, that earnings fluctuations could result in dividend cuts.
That hasn't been a problem for Ares Capital. The company has consistently generated significant profits, hence its highly attractive dividend. As a result, it's been able to pay a stable-to-growing dividend for more than 13 consecutive years.
Ares Capital has done a great job at managing the inherent risks associated with direct lending. It avoids exposure to more cyclical (and therefore more volatile) industries. Its portfolio is also highly diversified with 475 companies, none of which makes up more than 2% of the total. And Ares focuses on the upper end of the middle market, which tends to be less risky.
Perhaps the most impressive thing about Ares Capital is its track record of delivering solid total returns. Since its initial public offering in 2004, the stock's average annual total return tops 12%. That's a better performance than not only the BDC industry average; it also beat the S&P 500's average total return during the period.
This outperformance hasn't lost momentum. Over the last three years, Ares Capital's total return has basically doubled that of the S&P 500.
ARCC Total Return Level data by YCharts
There's also one more big plus about this BDC stock. Ares Capital's shares currently trade at a forward earnings multiple of only 8.7x. That's bargain territory in a stock market with a valuation near historic highs.
What is there not to like?
With all of those positives, it might seem that there isn't anything not to like about Ares Capital. However, every stock has at least one Achilles' heel.
Ares Capital does have debt of around $11.4 billion. Debt comes with the territory for BDCs. That's not a problem as long as Ares Capital's own borrowers pay what they owe. But there's a risk of more defaults if the economy takes a downward turn.
Overall, though, Ares Capital appears to be an attractive stock for income investors in particular. Although Buffett didn't pick it himself, it's arguably his best ultra-high-yield dividend stock.
