Ares Capital: The Only 10% Yielding BDC You Need

Core Viewpoint - Ares Capital Corporation is well-positioned to deliver stable net investment income in 2024, regardless of potential recession concerns, with a strong performance in the fourth quarter and a growing net asset value [2][15]. Financial Performance - In the fourth quarter, Ares Capital reported net investment income of $0.63 per share, a 7% increase QoQ, leading to a dividend coverage ratio improvement to 125% [11][12]. - The company's net asset value rose by $0.25 per share QoQ, reaching $19.24, reflecting a 1.3% increase [2][13]. - Ares Capital's portfolio value grew 4% QoQ to $22.9 billion, driven by new fundings totaling $699 million in the fourth quarter [4][5]. Credit Quality - The non-accrual ratio remained stable at 0.6% for both 3Q-23 and 4Q-23, indicating that the portfolio performed according to expectations [8][11]. - First Lien investments increased to 44%, while Second Liens decreased to 16%, with First and Second Senior Secured Loans comprising 61% of the total portfolio [4][8]. Market Environment - Federal Reserve Chair Jerome Powell indicated a cautious approach to rate cuts, suggesting a prolonged higher interest rate environment, which is favorable for Ares Capital [2][3]. - Ares Capital's portfolio is positioned with 69% floating rate, providing potential for net investment income growth in a stable or declining interest rate environment [6][15]. Investment Outlook - Ares Capital is classified as a Buy due to its consistent performance and improving credit quality, making it an attractive option for passive income investors [3][15]. - The company offers a 10% dividend yield, supported by a robust margin of safety in its dividend coverage [15].