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Ares Capital Corp.: This 9.5%-Yielding BDC Is Worth Buying

May 04, 2018 4:08 PM ETAres Capital (ARCC)33 Comments
Achilles Research profile picture
Achilles Research


  • I bought Ares Capital Corp. for my income portfolio in April.
  • Ares Capital Corp. has strong underwriting practices reflected in low non-accruals, and a debt investment portfolio that accentuates capital preservation.
  • Ares Capital Corp. has interest rate upside thanks to a large representation of floating-rate debt in its investment portfolio.
  • Ares Capital Corp. has maintained its dividend rate throughout the credit cycle. Shares currently sell for about net asset value.
  • An investment in ARCC yields 9.5 percent.

I have added business development company Ares Capital Corp. (NASDAQ:ARCC), one of the largest BDCs in the country, to my high-yield income portfolio at the end of last month. The business development company has paid a stable dividend for years, and about covers its payout with net investment income. The portfolio consists largely of relatively secure first and second lien debt, which should provide income investors with some downside protection in the event of a recession. Shares are selling for about net asset value. An investment in Ares Capital Corp. currently yields 9.5 percent.

I bought a couple of business development companies for my income portfolio again in 2018, including Goldman Sachs BDC (GSBD), Hercules Capital, Inc. (HTGC), Main Street Capital Corp. (MAIN), and, yes, Ares Capital Corp. The reason: Ares Capital Corp. has a strong loan portfolio and low non-accruals, and has a robust history of making reliable dividend payments to shareholders.

Ares Capital Corp. - A High-Quality BDC Worth Considering

Ares Capital Corp. predominantly invests in relatively safe first and second lien senior secured loans. Together, they accounted for 72 percent of the BDC's investment portfolio at the end of the first quarter. Subordinated loans, collateralized loan obligations and equity securities made up the remainder of Ares Capital Corp.'s portfolio. The higher the degree of seniority, the higher the degree of principal protection for Ares Capital Corp. and its shareholders. Hence, Ares Capital Corp. is rather defensively positioned in terms of its asset allocation.

Here's a breakdown of Ares Capital Corp.'s investment portfolio as of the end of the March quarter.

Source: Ares Capital Corp. Investor Presentation

As far as industry diversification is concerned, I'd say that Ares Capital Corp. has a moderate degree of diversification. The BDC has a concentration in healthcare and business services which together represent 42 percent

ChartARCC Price to Book Value data by YCharts

This article was written by

Achilles Research profile picture
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

Analyst’s Disclosure: I am/we are long ARCC, MAIN, HTGC, GSBD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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