Business development companies (BDCs) often make enticing dividend stock investments. These entities must distribute 90% of their taxable income to shareholders to avoid corporate-level taxes on their income. As a result, most BDCs pay attractive dividends.
Ares Capital (ARCC 2.27%) and Main Street Capital (MAIN 3.55%) are two more the most popular BDC stocks among income investors. Here's a look at which is the best one to buy for dividend income.
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Ares Capital
Ares Capital is the largest BDC. It had invested $28.7 billion across 587 portfolio companies as of the end of the third quarter. The bulk of its portfolio (71%) was senior secured loans. It primarily invests in middle-market companies (those with $100 million to $1 billion in annual revenue), although Ares will also invest in companies with more than $1 billion in revenue.
The company is part of the Ares franchise led by global alternative investment manager Ares Management. The BDC's parent company has nearly $600 billion in assets under management across credit, real assets, private equity, secondaries, and other businesses. Ares Capital's relationship with its parent provides it with several competitive advantages, including deep relationships with credit providers and an expanded deal flow.
NASDAQ: ARCC
Key Data Points
Ares Capital currently pays a quarterly dividend of $0.48 per share, giving it a 9.4% yield at its recent share price. The BDC has paid a stable to increasing dividend for the past 16 years (it has maintained its current rate since late 2022). It has also periodically paid an additional supplemental dividend of its excess net income (the last one was $0.03 per share in late 2022). Ares currently generates sufficient income to cover its dividend payment ($0.57 per share of GAAP net income in the third quarter and $0.50 per share of core earnings). The BDC is also carrying forward $1.26 per share of excess taxable income from 2024, which gives its dividend even more cushion.
Ares is in a strong position to continue expanding its investment portfolio. It secured $3.9 billion in new investment commitments across 35 new and 45 existing portfolio companies in the third quarter, compared to $2.6 billion in exited investment commitments during the same period. Ares also raised over $1 billion in new debt capital during the period, benefiting from its long-standing relationships with banks and institutional capital providers.
Main Street Capital
Main Street Capital primarily provides customized long-term debt and equity capital solutions to lower middle-market companies ($10 million to $150 million in annual revenue). It also makes private loans to companies owned or in the process of getting acquired by private equity funds. Portfolio companies in its private loan portfolio typically have annual revenues between $25 million and $500 million.
NYSE: MAIN
Key Data Points
The BDC's lower middle market portfolio has $2.2 billion of investments (70.7% debt) across 88 portfolio companies. Meanwhile, its private loan portfolio comprises $1.9 billion in investments (94% debt) across 86 portfolio companies.
Main Street Capital has a unique dividend policy. The BDC pays a monthly dividend set at a sustainable level (currently $0.26 per share). It aims to steadily grow its monthly dividend. The company has raised its monthly dividend payment by 4% over the past year and by 136% since its initial public offering in 2007. Main Street Capital has never reduced its monthly dividend. Its current distributable net investment income can cover its monthly dividend by a comfortable 1.4 times.
However, as a BDC, Main Street Capital needs to reach the 90% income distribution floor to remain in compliance with IRS regulations. It does that by periodically paying supplemental quarterly dividends of its excess income. Main Street has paid a $0.30 per share dividend each quarter for the past couple of years. When adding the supplemental dividend payments to the monthly dividend, Main Street Capital's annualized dividend yield is 7.2%. However, while the BDC has paid the same supplemental rate for the past few years, the company doesn't always pay supplemental dividends. It paid lower quarterly rates in 2022 and didn't make a supplemental payment for several quarters in 2021.
Compelling income options
Ares Capital and Main Street Capital are both attractive dividend stocks. Ares Capital is the better option for those seeking a bigger current yield backed by a large company. Meanwhile, Main Street Capital would be more appealing for those seeking a sustainable and growing recurring monthly income stream with the potential for additional supplemental quarterly payments.
