Ares Capital: 9.2% Yield and Special Dividends.
A recession has arrived, making it more important than ever for dividend investors to invest in business development companies that have a long track record of successfully managing investors' money.
Ares Capital $Ares Capital(ARCC)$ is a highly regarded business development firm with a long history of achieving high returns on equity. The BDC also has a conservative asset allocation and strong net investment income, which allows it to cover its growing dividend payout. Even when trading at a premium to net asset value, ARCC is a buy.
Ares Capital's investment portfolio did not change much in 2Q-22: the business development firm had an uneventful quarter in terms of portfolio composition, with only minor changes in the investment structure.
As of June 30, 2022, first lien senior secured loans accounted for 45% of Ares Capital's portfolio, while second lien senior secured loans accounted for 19% of loan investments.
Second Liens' weighting decreased by 2 percentage points from the previous quarter, while the BDC's investment allocation to investment manager Ivy Hill Asset Management increased by 2 percentage points. As of June 30, 2022, the total value of Ares Capital's investments was $21.7 billion.
Ares Capital's new investments made during the second quarter are more interesting than the company's little changed portfolio structure. Ares Capital made new commitments primarily to First Lien Senior Secured Notes, with this category accounting for 71% of new investments.
Following Ivy Hill Asset Management, Ares Capital has equity and subordinated loan investments. Ares Capital's largest investment, accounting for 8.5% of investments, is Ivy Hill Asset Management, which received 18% of new commitments.
Because of its size and equity nature, the investment has the potential to generate excess returns for Ares Capital. Ares Capital's other investments, primarily Senior Loans, received the remaining 11% of new commitments.
Management recently increased the dividend by $0.01 per share, or 2.4%, bringing the regular dividend to $0.43 per share. Ares Capital previously declared a $0.03 per share special dividend, which will be paid in addition to the regular base dividend on September 30, 2022.
To receive the dividend, investors must purchase before the ex-date, which is September 14, 2022. ARCC stock currently pays an 8.9% yield based solely on the regular dividend and assuming that the dividend will be maintained at $0.43 per share. When two special dividends of $0.03 per share are added in September and December, the yield rises to 9.2%.
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