Ares Capital: BDC With High Dividend and Put Options Yields

Includes: AFC, ARCC
by: Double Dividend Stocks

Ares Capital (NASDAQ:ARCC) is a Business Development Corp. (BDC), that was recently added to the Financial section of our High Dividend Stocks by Sector tables. ARCC is a closed-end mgt. investment company which invests in US mid-market firms, via mezzanine debt, first and second lien senior loans, and warrants. Ares just completed its purchase of ailing competitor Allied Corp. (NYSEARCA:ALD) in a drawn-out $905 million deal that began last October.

Ares looks good in our industry comparison table, with solid management, earnings, and valuation metrics that outshine its competitors. (Its PEG of .39, is still quite attractive, even though it's slightly higher than its peers average of .30).

ARCC’s 4th quarter 2009 earnings (excluding one-time merger costs) beat estimates: EPS of $.35 vs. $.33 in 2008 Q4 (see conference call transcript here).

ARCC’s next quarterly ex-dividend date should be approximately June 11th.

Ares closed at $15.10 this week, which puts it less than 2% below the high end of its 52-week range ($4.12 – $15.28). For income investors looking for a lower entry point, selling put options also offers a high yield on this dividend paying stock:

  • Price/Share: $15.10
  • September $15.00 Strike PUT Symbol: ARF\10U18\15.0
  • Bid price: $1.60
  • Nominal Yield: 10.60%
  • Annualized Yield: 24.02%
  • Breakeven: $13.40 Dividend Yield at Breakeven Cost: 10.45%

(Note: The above Put Yields are based upon a 100% cash reserve, i.e. $1500.00 per put contract sold).

Alternatively, income investors who want to increase their income on this stock could do so by selling covered calls:

  • Current Price: $15.10
  • September $15.00 Strike CALL Symbol: ARF\10I18\15.0
  • Bid price: $1.10 Yield: 7.28%
  • Dividends pre-Expiration: $.70 Dividend Yield pre-Expiration: 4.64%
  • Total Static Nominal Yield: 11.65%
  • Annualized Yield: 25.52%
  • Breakeven: $13.20

Note: If ARCC rises close to or above $16.10, your underlying shares will probably be assigned/sold. The sale price would be at the $15 call strike price; therefore you’d lose $.10/share, for a net gain of $1.70/share in an assigned scenario (still a 25.94% annualized yield). ($15.00 strike price less $15.10/share cost = -$.10)

Disclosure: Author is short puts of ARCC.

Disclaimer: This article is written for informational purposes only.