Ares Capital's Yield Hard to Sustain, Realty Income Offers More Stability
Written by Emily J. Thompson, Senior Investment Analyst
Updated: 5 days ago
0mins
Should l Buy ARCC?
Source: NASDAQ.COM
- Yield Challenges: Ares Capital's forward dividend yield stands at 9.9%, yet sustaining this high yield is increasingly difficult as interest rates decline, with projected EPS dropping from $2.68 in 2023 to $1.86 in 2025, falling short of the $1.92 dividend payout per share.
- Portfolio Risk Management: Ares currently invests in 603 companies across its $29.5 billion portfolio, allocating 60.5% to first-lien secured loans and 5% to second-lien secured loans to mitigate credit risk; however, the performance of floating-rate loans remains sensitive to the Fed's benchmark rate.
- Realty Income's Advantages: As one of the world's largest REITs, Realty Income owns over 15,500 commercial properties, and despite some tenants facing store closures, strong tenants like 7-Eleven and Dollar General help maintain an occupancy rate above 96%, with a forward yield of 5.1%.
- Profitability Outlook: Realty expects its adjusted funds from operations (AFFO) per share to rise by 1%-2% to $4.25-$4.27 in 2025, comfortably covering its $3.22 dividend payout per share, indicating a more attractive income opportunity compared to Ares in the current market environment.
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Analyst Views on ARCC
Wall Street analysts forecast ARCC stock price to rise
7 Analyst Rating
6 Buy
1 Hold
0 Sell
Strong Buy
Current: 19.470
Low
21.00
Averages
22.50
High
24.00
Current: 19.470
Low
21.00
Averages
22.50
High
24.00
About ARCC
Ares Capital Corporation is a specialty finance company focused on providing direct loans and other investments in private middle market companies in the United States. The Company invests primarily in first lien senior secured loans (including unitranche loans, which are loans that combine both senior and subordinated debt, generally in a first lien position), and second lien senior secured loans. In addition to senior secured loans, it also invests in subordinated debt, which in some cases includes an equity component, and preferred equity. It also may invest up to 30% of its portfolio in non-qualifying assets. Its investment activities are focused on industries, such as software and services, health care services, commercial and professional services, financial services, commercial and professional services, insurance services, energy, food and beverage and others. The Company is externally managed by Ares Capital Management LLC (investment adviser).
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
Comparing High Dividends of AGNC and Ares Capital
- AGNC Overview: AGNC Investment boasts a monthly dividend yield exceeding 12.5%, significantly higher than the S&P 500's current yield of about 1.1%, indicating its appeal in low-risk fixed-income investments, although its 7.2x leverage ratio could impact dividend stability if market conditions worsen.
- Ares Capital Strength: As the largest BDC, Ares Capital focuses on providing direct loans to middle-market companies, achieving a 9.3% weighted average yield in its portfolio, and has maintained stable or growing dividends for over 16 consecutive years, showcasing its strong balance sheet and liquidity.
- Yield vs. Growth Trade-off: AGNC's higher yield and monthly dividend payments make it an ideal choice for risk-tolerant investors seeking income, while Ares Capital offers greater growth potential through increasing portfolio value and dividends, appealing to those seeking higher total returns.
- Long-term Return Performance: Since its IPO in 2008, AGNC has delivered an average annualized total return of 11.8%, while Ares Capital has provided a 12% annualized total return to investors over the past 20 years, highlighting both companies' stability and attractiveness under varying market conditions.
See More
Analysis of High Dividend Yields from AGNC and Ares Capital
- Dividend Yield Comparison: AGNC Investment boasts a monthly dividend yield exceeding 12.5%, while Ares Capital offers a quarterly yield of 9.6%, both significantly higher than the S&P 500's current yield of 1.1%, highlighting their appeal to income-focused investors.
- AGNC's Stability: AGNC has maintained its monthly dividend since 2020, supported by a 7.2x leverage ratio and a robust MBS market; although market fluctuations may necessitate future dividend adjustments, it has achieved an annualized total return of 11.8% since its 2008 IPO.
- Ares Capital's Growth Potential: As the largest BDC, Ares Capital's loan portfolio has a weighted average yield of 9.3%, and it has consistently paid stable or increasing dividends for over 16 years, demonstrating strong financial management and liquidity.
- Investor Choice: AGNC's higher current yield and monthly payments make it suitable for risk-tolerant investors, while Ares Capital's growth potential and stable dividends appeal to those seeking higher total returns.
See More
Credit Market Risks Amid AI Disruption
- Rising Default Risks: UBS analysts project that corporate loan defaults could reach between $75 billion and $120 billion over the next year, particularly impacting software and data services firms owned by private equity, thereby exacerbating instability in the credit markets.
- Delayed Market Reaction: Analysts note that the market has been slow to respond to the rapid advancements in AI technology, with many investors failing to timely recalibrate their views on credit evaluations, leading to an underestimation of credit risks that could trigger broader credit tightening.
- Potential Credit Crisis: In a worst-case scenario, default rates could double the baseline estimates, resulting in a sharp decline in liquidity in the credit markets, creating what is known as a 'tail risk' that could severely impact many companies.
- Industry Classification Impact: Mish categorizes companies into three groups, indicating that creators of foundational large language models like Anthropic and OpenAI are likely to emerge as winners, while high-debt private equity-owned software firms face greater survival pressures and may be eliminated in the AI transformation.
See More
Ares Capital Faces Dividend Pressure Amid Interest Rate Declines
- Dividend Yield Pressure: Ares Capital's forward dividend yield stands at 9.9%, yet sustaining this high yield is increasingly challenging as interest rates decline, with projected EPS dropping to $1.86 in 2025, falling short of the $1.92 dividend payout level.
- Diversified Portfolio: Currently, Ares Capital invests in 603 companies across a $29.5 billion portfolio, allocating 60.5% to first-lien secured loans and 5% to second-lien secured loans to mitigate credit risk and ensure stability amid economic fluctuations.
- Increased Market Competition: While Ares stock appears cheap at 10 times forward earnings, other blue-chip stocks like Realty Income are more attractive, owning over 15,500 commercial properties and growing faster in a declining interest rate environment.
- REITs vs. BDCs: Both REITs and BDCs must distribute at least 90% of taxable income as dividends, but REITs typically grow faster when rates decline; Realty Income's forward yield is 5.1%, with expected AFFO growth of 1%-2% to $4.25-$4.27 in 2025, comfortably covering its $3.22 dividend payout.
See More
Ares Capital's Yield Hard to Sustain, Realty Income Offers More Stability
- Yield Challenges: Ares Capital's forward dividend yield stands at 9.9%, yet sustaining this high yield is increasingly difficult as interest rates decline, with projected EPS dropping from $2.68 in 2023 to $1.86 in 2025, falling short of the $1.92 dividend payout per share.
- Portfolio Risk Management: Ares currently invests in 603 companies across its $29.5 billion portfolio, allocating 60.5% to first-lien secured loans and 5% to second-lien secured loans to mitigate credit risk; however, the performance of floating-rate loans remains sensitive to the Fed's benchmark rate.
- Realty Income's Advantages: As one of the world's largest REITs, Realty Income owns over 15,500 commercial properties, and despite some tenants facing store closures, strong tenants like 7-Eleven and Dollar General help maintain an occupancy rate above 96%, with a forward yield of 5.1%.
- Profitability Outlook: Realty expects its adjusted funds from operations (AFFO) per share to rise by 1%-2% to $4.25-$4.27 in 2025, comfortably covering its $3.22 dividend payout per share, indicating a more attractive income opportunity compared to Ares in the current market environment.
See More
High-Yield Stocks Attract Investor Attention
- AGNC Investment Advantage: AGNC Investment Corp leads with a 12.5% dividend yield, appealing to passive income investors with its monthly payments, having maintained this rate for over five years post-pandemic, indicating strong profitability in the robust Agency MBS market.
- Ares Capital's Stability: Ares Capital currently offers a 10% dividend yield, with its business model of direct loans to middle-market companies generating core earnings that exceed dividend payments, maintaining or increasing dividends for 16 consecutive years, showcasing strong financial stability and growth potential.
- Western Midstream's Growth Potential: Western Midstream Partners yields 8.9%, with stable cash flows and a strong balance sheet allowing it to cover distributions and capital expenditures, while planning to enhance dividends through acquisitions and organic expansion.
- Attracting Risk-Tolerant Investors: With dividend yields significantly higher than the S&P 500, AGNC, Ares Capital, and Western Midstream appeal to income-seeking investors despite potential market volatility risks, making them attractive options for those willing to take on more risk.
See More
Comparing High Dividends of AGNC and Ares Capital
- AGNC Overview: AGNC Investment boasts a monthly dividend yield exceeding 12.5%, significantly higher than the S&P 500's current yield of about 1.1%, indicating its appeal in low-risk fixed-income investments, although its 7.2x leverage ratio could impact dividend stability if market conditions worsen.
- Ares Capital Strength: As the largest BDC, Ares Capital focuses on providing direct loans to middle-market companies, achieving a 9.3% weighted average yield in its portfolio, and has maintained stable or growing dividends for over 16 consecutive years, showcasing its strong balance sheet and liquidity.
- Yield vs. Growth Trade-off: AGNC's higher yield and monthly dividend payments make it an ideal choice for risk-tolerant investors seeking income, while Ares Capital offers greater growth potential through increasing portfolio value and dividends, appealing to those seeking higher total returns.
- Long-term Return Performance: Since its IPO in 2008, AGNC has delivered an average annualized total return of 11.8%, while Ares Capital has provided a 12% annualized total return to investors over the past 20 years, highlighting both companies' stability and attractiveness under varying market conditions.
See More
Analysis of High Dividend Yields from AGNC and Ares Capital
- Dividend Yield Comparison: AGNC Investment boasts a monthly dividend yield exceeding 12.5%, while Ares Capital offers a quarterly yield of 9.6%, both significantly higher than the S&P 500's current yield of 1.1%, highlighting their appeal to income-focused investors.
- AGNC's Stability: AGNC has maintained its monthly dividend since 2020, supported by a 7.2x leverage ratio and a robust MBS market; although market fluctuations may necessitate future dividend adjustments, it has achieved an annualized total return of 11.8% since its 2008 IPO.
- Ares Capital's Growth Potential: As the largest BDC, Ares Capital's loan portfolio has a weighted average yield of 9.3%, and it has consistently paid stable or increasing dividends for over 16 years, demonstrating strong financial management and liquidity.
- Investor Choice: AGNC's higher current yield and monthly payments make it suitable for risk-tolerant investors, while Ares Capital's growth potential and stable dividends appeal to those seeking higher total returns.
See More
Credit Market Risks Amid AI Disruption
- Rising Default Risks: UBS analysts project that corporate loan defaults could reach between $75 billion and $120 billion over the next year, particularly impacting software and data services firms owned by private equity, thereby exacerbating instability in the credit markets.
- Delayed Market Reaction: Analysts note that the market has been slow to respond to the rapid advancements in AI technology, with many investors failing to timely recalibrate their views on credit evaluations, leading to an underestimation of credit risks that could trigger broader credit tightening.
- Potential Credit Crisis: In a worst-case scenario, default rates could double the baseline estimates, resulting in a sharp decline in liquidity in the credit markets, creating what is known as a 'tail risk' that could severely impact many companies.
- Industry Classification Impact: Mish categorizes companies into three groups, indicating that creators of foundational large language models like Anthropic and OpenAI are likely to emerge as winners, while high-debt private equity-owned software firms face greater survival pressures and may be eliminated in the AI transformation.
See More
Ares Capital Faces Dividend Pressure Amid Interest Rate Declines
- Dividend Yield Pressure: Ares Capital's forward dividend yield stands at 9.9%, yet sustaining this high yield is increasingly challenging as interest rates decline, with projected EPS dropping to $1.86 in 2025, falling short of the $1.92 dividend payout level.
- Diversified Portfolio: Currently, Ares Capital invests in 603 companies across a $29.5 billion portfolio, allocating 60.5% to first-lien secured loans and 5% to second-lien secured loans to mitigate credit risk and ensure stability amid economic fluctuations.
- Increased Market Competition: While Ares stock appears cheap at 10 times forward earnings, other blue-chip stocks like Realty Income are more attractive, owning over 15,500 commercial properties and growing faster in a declining interest rate environment.
- REITs vs. BDCs: Both REITs and BDCs must distribute at least 90% of taxable income as dividends, but REITs typically grow faster when rates decline; Realty Income's forward yield is 5.1%, with expected AFFO growth of 1%-2% to $4.25-$4.27 in 2025, comfortably covering its $3.22 dividend payout.
See More
Ares Capital's Yield Hard to Sustain, Realty Income Offers More Stability
- Yield Challenges: Ares Capital's forward dividend yield stands at 9.9%, yet sustaining this high yield is increasingly difficult as interest rates decline, with projected EPS dropping from $2.68 in 2023 to $1.86 in 2025, falling short of the $1.92 dividend payout per share.
- Portfolio Risk Management: Ares currently invests in 603 companies across its $29.5 billion portfolio, allocating 60.5% to first-lien secured loans and 5% to second-lien secured loans to mitigate credit risk; however, the performance of floating-rate loans remains sensitive to the Fed's benchmark rate.
- Realty Income's Advantages: As one of the world's largest REITs, Realty Income owns over 15,500 commercial properties, and despite some tenants facing store closures, strong tenants like 7-Eleven and Dollar General help maintain an occupancy rate above 96%, with a forward yield of 5.1%.
- Profitability Outlook: Realty expects its adjusted funds from operations (AFFO) per share to rise by 1%-2% to $4.25-$4.27 in 2025, comfortably covering its $3.22 dividend payout per share, indicating a more attractive income opportunity compared to Ares in the current market environment.
See More
High-Yield Stocks Attract Investor Attention
- AGNC Investment Advantage: AGNC Investment Corp leads with a 12.5% dividend yield, appealing to passive income investors with its monthly payments, having maintained this rate for over five years post-pandemic, indicating strong profitability in the robust Agency MBS market.
- Ares Capital's Stability: Ares Capital currently offers a 10% dividend yield, with its business model of direct loans to middle-market companies generating core earnings that exceed dividend payments, maintaining or increasing dividends for 16 consecutive years, showcasing strong financial stability and growth potential.
- Western Midstream's Growth Potential: Western Midstream Partners yields 8.9%, with stable cash flows and a strong balance sheet allowing it to cover distributions and capital expenditures, while planning to enhance dividends through acquisitions and organic expansion.
- Attracting Risk-Tolerant Investors: With dividend yields significantly higher than the S&P 500, AGNC, Ares Capital, and Western Midstream appeal to income-seeking investors despite potential market volatility risks, making them attractive options for those willing to take on more risk.
See More
