In case you need a reminder that dividend investing works…
Back in January, I recommended the shares of Ares Capital Corp. (NYSE: ARCC). I noted at the time that Ares was a “steady eddy income machine” with a high yield at a time when most traditional income stocks still yielded close to nothing.
My, what a difference a few months make!
After the Federal Reserve’s four consecutive interest rate hikes, a surge in both inflation and bond yields and, of course, a nasty bear market across many assets, market yields are higher. The Fed funds rate is the highest it’s been in almost two decades at 4%.
But ARCC’s 9.8% yield is still one of the highest you’re going to find, even in this new high-yield world.
What Happened to Ares Capital Since January
Just for grins, let’s see how my Ares recommendation panned out.
I’ll admit: My timing could have been better. I made the call on January 5, just as the bear market was getting underway. And ARCC certainly wasn’t immune to the bear’s claws. The shares were priced at $21.26 at the time of the article. As I write this, ARCC stock trades around $19.50.
That’s a decline of almost 8%. By 2022’s standards, that’s modest.
The story gets better, however.
Remember how I said that dividend investing works?
ARCC has already paid $1.36 in dividends this year. That hacks the loss down to just 1.6%. And there’s another $0.46 dividend expected next month, which would put the stock in positive territory during one of the nastiest years for investors in recent memory.
Now, a high-dividend yield is not a permanent “get out of jail free” card. High-yield stocks can and do lose money all the time. But they can provide a degree of stability when not much else is working in your portfolio.
Perhaps most important, that high yield represents a realized return. You don’t have to sell the stock at unfavorable prices to meet living expenses. You can enjoy the dividend instead!
Let’s return to Ares Capital.
ARCC Stock Power Ratings
The stock rates a “Neutral” 55 out of 100 on our Stock Power Ratings system. That means we expect to perform in line with the overall market over the next 12 months.
But I think it’s important to drill down deeper.
The stock loses points on our value and quality factors.
This is pretty normal for business development companies (BDCs) and needs to be taken in context. BDCs tend to carry debt, which hurts them on our quality factor, and their quirky accounting punishes them on both quality and valuation. This is a “known issue” and one we see with REITs and other nontraditional stock investments.
That’s OK. I’m more interested in ARCC’s bullish factors.
The stock rates a respectable 67 on growth. It also rates a 64 on volatility, meaning it is much less volatile than the average stock. That’s common among blue-chip BDCs, and we saw the benefits of this in 2022.
But I’m most interested in the stocks momentum rating of 70. At a time when so much of the market looks weak, ARCC’s strength is shining through. Shell-shocked investors are rotating into names that offer a little more stability. And the fat dividend yield of close to 10% doesn’t hurt either!
Bottom line: We’ll see what the final weeks of 2022 bring. But I’m betting ARCC continues to deliver the goods well into 2023 and beyond.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.