Ares Capital (ARCC) is another Business Development Company (BDC) that offers a method for investors to start compounding wealth and growing their income. It is the largest BDC and is well-established and well-regarded by investors and analysts. In comparison to some BDCs, such as Main Street Capital (MAIN) which invest in equity in companies, ARCC focuses on lending and maintains a portfolio of high-quality first-lien loans to growing firms. As such, ARCC does not experience the growth that MAIN sees and, instead, focuses on delivering a strong dividend yield that is well-covered by the underlying investments.
Investing in Ares Capital can be a great way to build wealth and secure your financial future. There are many advantages to investing in Ares Capital that make it an attractive choice for investors both big and small. As one of the largest non-bank lenders, Ares Capital offers a wide range of investment options and opportunities for lower risk and higher returns than traditional banking. This article will discuss why investing in Ares Capital is beneficial and what types of returns you can expect from an investment.
ARCC – compounding wealth with time
Investing in business development companies (BDCs) is a valuable option for those looking to diversify their portfolio and capitalize on the growth of the economy. BDCs are publicly traded, secure investments that provide investors with both capital appreciation and income from dividends. Furthermore, BDCs are managed by experts who have experience in corporate finance and capital investments.
Historically, if we look at the price returns from ARR, we would be disappointed as the prices have tracked sideways since inception, delivering relatively negligible returns (Figure 1). There are opportunities to buy ARCC at a discount from time-to-time and, and with the right entry at lower prices, investors can grow wealth and lock in steady dividend streams with time.
Compounding wealth works by reinvesting all money earned back into the investment, creating a growth that can lead to large gains in time. Taking advantage of this strategy helps create a consistent flow of passive income while also helping further grow your initial investments. This is why many people choose to make their money work for them, by utilizing compounding wealth as one of their financial strategies.
The ARCC dividend
Investing for dividend yield is a popular strategy for many investors. It allows individuals to receive income from their investments and has the potential to create wealth over time. BDCs are an often overlooked but highly attractive option for those looking to invest for dividend yield. BDCs provide capital to small- and medium-size businesses, which can help drive economic growth. They have attractive tax advantages and are well-positioned to capitalize on the current economic environment.
ARCC is not a disappointment in terms of the dividend yield. ARCC has a 9.9% dividend yield and a five-year dividend growth rate of 2.5% (source: Stock Rover)
Investment opportunities in ARCC
There are some good opportunities for compounding wealth and growing income with ARCC. At present, it is not undervalued (as it has been several times in the past, notably during the depths of the pandemic issues in 2020). However, the company is growing with the headwinds from rising interest rates promising stronger earnings in the near future. As such, investing today could return an annualized rate of return of about 14% over the coming year, mostly from dividends but partly also from potential capital appreciation as ARCC’s earnings increase.
Final thoughts and risks
One of the biggest risks for ARCC would be a general and long-term recessionary environment. It would hurt the ability of ARCC’s clients to repay loans and, therefore, hurt ARCC’s earnings. As a consequence, tough economic times would likely see the share price substantially reduced. This is not the type of investment you want to make with significant margin involved!
If you like dividends as much as I do, BDCs are useful to substantially increase the portfolio dividend income. As such, they play a role in a well-diversified portfolio that focuses on growing and developing dividend yields.
Dr. Lincoln C. Wood teaches at the University of Otago in New Zealand. He is an avid investor and educator. He loves cash flow, income, and dividends when investing. He likes to buy undervalued companies with strong advantages and earnings growth.