I'm not yet in the stage of life where I need the stocks I own to generate income. But my portfolio includes quite a few stocks that pay generous dividends.
A few days ago, I added another to the list -- Ares Capital (ARCC 0.73%). Here are four reasons why I just loaded up on this stock with an ultra-high dividend yield of 9.8%.
1. A strong and growing business
When I buy a stock, what I'm really doing is investing in the underlying business. What is Ares Capital's underlying business? It's a business development company (BDC) that provides financing to middle-market businesses.
I like the opportunities, in general, for BDCs. Many banks aren't interested in providing direct lending to middle-market companies. BDCs make it much easier and quicker for these businesses to raise capital. Unsurprisingly, larger middle-market companies have increasingly turned to direct lending from BDCs.
But I especially like Ares Capital's prospects. It's the largest publicly traded BDC. Ares Capital's portfolio is more diversified than most of its peers and minimizes exposure to highly cyclical industries. The company continues to deliver strong growth, with its generally accepted accounting principles (GAAP) earnings per share more than quadrupling year over year in the third quarter of 2023.
CEO Kipp deVeer noted in the Q3 update that "the investing environment from a risk/reward standpoint remains attractive." He added that Ares Capital should be in a good position "to benefit from current market dynamics." I think he's right.
2. A great track record
In my opinion, companies that have consistently achieved success in the past are the ones most likely to do so in the future. Ares Capital's great track record, therefore, ranks as an important factor in my decision to buy the stock.
The company has outperformed the broader BDC industry in multiple categories through the years, including higher net asset value (NAV) growth and lower loss rates. Ares Capital has maintained long-standing investment-grade credit ratings. It has invested more than $88 billion, spread over nearly 2,000 transactions, since 2004.
During that time, Ares Capital has absolutely trounced the S&P 500 as well as the BDC and banking industries based on total returns generated. The stock's total returns have also continued to outperform the S&P 500 by a wide margin over the last three years.
ARCC Total Return Level data by YCharts
3. An attractive valuation
Despite handily beating the S&P 500 in recent years, Ares Capital's valuation remains attractive. The stock trades at less than 8.5 times expected earnings. Its price-to-book ratio is only 1.03x.
4. The most important reason to buy
The most important reason of all for why I loaded up on Ares Capital, though, is that I expect the stock will make me money over the long term. Ares Capital's strong and growing business, great track record, and attractive valuation all factor into my thinking on this front. But I'd be lying if I didn't admit that the dividend is key, too.
Ares Capital's share price doesn't have to do much at all for me to make money, as long as the company continues to pay its dividend in the ballpark of the current level. I'm confident that will be the case. The BDC has paid a stable-to-increasing dividend for more than 13 consecutive years (excluding special dividends paid from time to time). Also, its core earnings per share easily cover the dividend with ample cushion to spare.
And speaking of making money, sooner or later, I will rely on my investments to generate income. Ares Capital looks like a good way to do so.
