Besides traditional high-yield income investment in the REIT or MLP sector, business development companies also offer investors significant yield potential.
One of those companies worth a closer look is Ares Capital Corporation (NASDAQ:ARCC). Ares Capital Corporation grew into an industry leader over the last 10 years, massively grew its investment portfolio, has a very convincing revenue and earnings growth record and rewards investors handsomely with dividends. With a current dividend yield of almost 9%, Ares Capital is a solid alternative to other high-yield investments in the REIT or MLP sector.
Ares Capital is an asset management business which provides capital to middle market companies. The asset management company usually targets free cash flow strong businesses with an annual EBITDA of $10-250 million and total enterprise values of $100 million-1.0 billion to invest in.
Ares Capital is regulated as a business development company (BDC) which are paying out most of their earnings as dividends to shareholders. This also implies, that the majority of total returns will come from dividends rather than capital appreciation.
BDCs basically allow retail investors to get access middle market investment opportunities which would mostly be out of reach for the average investor.
Strong portfolio growth underpinning earnings growth
Ares Capital has experienced strong growth in its investment portfolio over the years and has become one of the largest business development companies in the sector with a market capitalization of $5.2 billion.
From 2009 to 2013, Ares Capital's investment portfolio has grown by a whopping 251% (on a fair value basis) from $2.2 billion to $7.6 billion.
Ares Capital's first quarter 2014 results have also highlighted that the asset management company further succeeds in growing its investment portfolio from which it derives its returns. It now has invested in 195 portfolio companies with investments totaling $7.8 billion.
High degree of diversification reducing risk for shareholders
Business development companies usually do not concentrate on specific sectors, but invest across defensive industries in order to minimize overall investment risk.
This holds also true for Ares Corporation which invests in sectors ranging from Healthcare Services to Energy and Retail while focusing on First Lien Senior Secured Loans.
Impressive revenue and earnings track record
There is probably nothing more confidence inducing then having a successful track record. Ares Capital has grown revenues and earnings explosively since 2004.
Ares Capital's growth record is nothing short of being spectacular with revenues ballooning from $4 million in 2004 to $882 million in 2013. Given Ares Capital's historic growth, it is likely that its experienced management can continue to grow its financing business in the years ahead.
Solid dividend record
Strong revenue and earnings growth also translated into meaningful dividend growth for shareholders. Ares Capital currently pays a quarterly dividend of $0.38 per share or an annualized amount of $1.52.
At a share price of around $17, this translates into a solid dividend yield of approximately 9%.
More importantly, besides a high dividend yield, Ares Capital has shown that it can raise dividends over the years: In early 2005, Ares Capital paid investors only $0.30 per share.
Moreover, Ares Capital irregularly supplements its quarterly cash payments by special dividends which have historically ranged from $0.05 to $0.10 per share.
The Foolish Bottom Line
Ares Capital is an interesting high-yield investment alternative to REITs or MLPs. With a solid investment portfolio growth record, consistently rising revenues and core earnings and a respectable dividend yield, Ares Capital makes a very convincing investment proposition.