It’s not common to come across a large-cap stock on Wall Street that offers high dividends and has a lower share price, but still manages to be popular. Yet, Ares Capital (ARCC) meets these criteria.
Out of the 14 analysts polled by LSEG (LNST.Y) in July, eleven advised to either buy or strongly consider purchasing Ares Capital stock. If the stock price remains below $25, I believe the wise decision would be a definitive “yes” for investing. Here are four compelling reasons that support this viewpoint.
1. A fantastic dividend
In my discussion about investing in Ares Capital, I couldn’t help but bring up its exceptional dividend. This stock provides a generous dividend yield of approximately 8.36%, which is quite common for Ares Capital. Over the past decade, its average yield has been around 9.32%.
For more good news, Ares Capital has been consistently increasing or maintaining its dividend for over fifteen consecutive years. In fact, it has raised its dividend by approximately 20% during the past five years.
As an ardent investor, I can confidently say that I don’t foresee the impressive dividend history of Ares Capital coming to an end any time soon. Being a Business Development Company (BDC), Ares Capital is required to distribute at least 90% of its earnings as dividends in order to evade federal income taxes. So, as long as this company remains profitable, it will continue to generously reward its shareholders with dividends.
2. A growing market
BDCs (Business Development Companies) typically invest in companies that generate an annual revenue of around $10 million to $1 billion. They primarily do so by offering direct loans, rather than equity investments. This specific market sector has been experiencing a significant and fast-paced growth trend.
As reported by State Street Investment Management, the private credit market has expanded significantly over the past ten years, reaching almost $2 trillion. A large portion of this growth can be attributed to direct lending. Morgan Stanley predicts that this market will grow further to $2.8 trillion by the year 2028. McKinsey estimates that the potential U.S. market for private credit could potentially exceed $30 trillion.
I believe Ares Capital is in the right business at the right time.
3. An industry leader
Ares Capital stands out as an industry pioneer, operating in a well-timed and lucrative sector. It boasts the title of the largest publicly traded Business Development Company (BDC) in the United States, holding a market capitalization of nearly $16 billion.
This stock has consistently provided an average yearly increase of 13% since it went public in 2004. Compared to the S&P 500’s total return over the same timeframe, this is approximately an 80% difference in favor of the stock. Over the last decade, Ares Capital has consistently ranked first for annualized stock-based total return among its competitors.
I credit Ares Capital’s achievement to its diversified and top-tier investment portfolio. The Business Development Company (BDC) manages a portfolio worth $27.1 billion, with over 566 businesses in it. Each investment accounts for just 0.2%, with the largest one representing approximately 2% of the total assets. Approximately 68% of this portfolio is composed of senior secured loans, which are backed by collateral and are prioritized for repayment above other types of debt.
It’s comforting to know that Ares Capital is backed by a top-tier external manager, Ares Management (ARES). In fact, they were honored with two prestigious awards last year: The Alternative Fund Manager of the Year at the Alternative Credit Awards and The Global Fund Manager of the Year by Private Debt Investor magazine in 2024.
4. A compelling valuation
Another good reason to purchase Ares Capital when its price is under $25 lies in its attractive pricing relative to its intrinsic value, a point that goes beyond just considering the current share price.
The multiple of Ares Capital’s expected earnings compared to its share price, as reported by LSEG, stands at 11.3. This figure is approximately half the forward earnings multiple of the S&P 500. It’s worth noting that Business Development Companies (BDCs) typically trade at lower valuations. However, it’s important to remember that Ares Capital has consistently outperformed the S&P 500 over the long term. Given its exceptionally high dividend yield and strong position in a rapidly expanding industry, I believe the current price offers great value for this top-tier BDC stock.
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2025-07-24 12:28