Sezeryadigar/E+ via Getty Images If you are an income-focused investor, you’ve likely come across business development companies (or “BDCs”) more than once. Known for their big dividend yields, these unique investment companies basically provide financing (mainly loans and sometimes equity investments) to smaller middle market businesses. In this article, we share important data on over 40 big-dividend BDCs and then dive deeper into one specific name from the list, Ares Capital (NASDAQ: ARCC ). 40 Big-Dividend BDCs:
For starters, here is a look at some important data on over 40 big-dividend BDCs (sorted alphabetically), including dividend yield, current/historical price-to-book values and more. Big Dividend BDCs, Part 1 Big Dividend BDCs, Part 2 Big Dividend BDCs, Part 3 Obviously, if you are an income-focused investor, dividend yield can be an important metric to look at, but it is not the “end all, be all” factor (as we explain in more detail later in this report). Another important factor is price to (tangible) book value—because it can give an idea about current valuation (for example, BDCs trading at a discount to book value can be attractive, but certain BDC’s also warrant trading at a premium). Also notice, the table includes 5-year price-to-book range (this can help you understand a particular BDC’s current valuation as compared to where it has traded historically).
Generally speaking, we like to own BDCs with attractive business models, trading at attractive prices (as compared to book value) and with strong and healthy dividend payouts (note the table also shows average annual compound dividend growth for the last 3 years). BDCs can vary widely, but a few perennial favorites on our list above include Main Street Capital (NYSE: MAIN ), TriplePoint Venture Growth (NYSE: TPVG ), Owl Rock Capital (NYSE: ORCC ) and Gladstone (NASDAQ: GAIN ). However, in this particular report, we dive into an analysis of the largest BDC, Ares Capital. What Is a Business Development Company?
Before diving into Ares Capital, it’s worthwhile to consider some important high-level information about BDCs in general. Firstly, a business development company, or BDC, is a closed-end investment company that invests in privately owned, middle market companies, providing them capital to grow or recapitalize. BDCs were created by congress in the early 1980’s as a way to help smaller businesses. A few BDC advantages are described below: High dividend yield as BDCs are generally required to distribute 90% of their profits to shareholders as per the governing law.
Being a regulated investment company, a BDC is not required to pay corporate income tax on profits.
They offer diversification as the portfolio consists of companies belonging to varied industries.
Experienced Investment management teams.
Fair amount of liquidity and transparency as BDCs are traded on public exchanges, unlike venture capital funds which are privately placed.
As they are traded on stock exchanges, periods of volatility can lead to shares of BDCs trading at attractive discounts to NAVs.
And with that backdrop, let’s dive in Ares Capital. Overview: Ares Capital
In addition to the healthy 7.7% dividend yield, there are lots of things to like about Ares Capital, including its low exposure to cyclical industries, its impressive portfolio quality, extensive industry relationships and its conservative balance sheet, to name just a few. And despite the dramatic share price sell off of over 50% during 2020 (Covid had that effect on most BDCs), Ares has maintained its solid dividend, and the shares have recovered and hit new highs (supported by Ares’ fundamentals and diversified, defensive portfolio). Big Dividends PLUS, Blue Harbinger Business Model:
Ares Capital is the largest BDC in the US with a portfolio value of $17.7B as of September 2021 (the company is expected to report Q4 in early February). It was founded in 2004 and completed its IPO in the same year. Ares primarily invests in first lien senior secured loans and second lien senior secured loans (together comprising 72% of the portfolio). It also makes non-controlling equity investments and invests in senior subordinate loans, which may include an equity or preferred equity component.
Its portfolio consists of 371 companies across 24 industries. These are primarily private middle-market companies with EBITDA ranging between $10M to $250M. The average portfolio company EBITDA was $111M as of Q3 2021. In general, Ares invests between $10M to $500M in debt and up to $20M in equity per company. As per the company’s filings, the portfolio investments usually do not have a credit rating but they would be below investment grade […]