ARCC - 2 Stocks Yielding Up To 12%: The Latest Acquisitions For The Dividend Income Accelerator Portfolio

2023-11-09 18:00:00 ET

Summary

• The generation of income via dividends allows you to support your financial expenditures without needing to liquidate positions of your portfolio.
• In this article, I will introduce you to two Business Development Companies (BDCs), that pay large amounts of dividends and which I have added to The Dividend Income Accelerator Portfolio.
• After their inclusion, the Weighted Average Dividend Yield [TTM] of The Dividend Income Accelerator Portfolio is at an attractive level of 4.49%.
• Bank of America and Apple now represent the largest individual positions of The Dividend Income Accelerator Portfolio, accounting for 5.40% and 5.28% of the overall portfolio respectively.

Investment Thesis

Today's article explores the strategic rationale for incorporating Ares Capital ( ARCC ) and BlackRock TCP Capital Corp ( TCPC ) into The Dividend Income Accelerator Portfolio. I will further demonstrate how their inclusion will affect the portfolio's risk profile along with its Weighted Average Dividend Yield and Weighted Average Dividend Growth Rate.

The latest incorporations into The Dividend Income Accelerator Portfolio have been made with the objective of enhancing its Weighted Average Dividend Yield [TTM]. From my point of view as an investment analyst and dividend income investor, this is a critical metric since it allows us to measure a reliable income stream.

Both Ares Capital and BlackRock TCP Capital pay shareholders an attractive Dividend Yield: while Ares Capital's Dividend Yield [FWD] stands at 9.77%, BlackRock TCP Capital is at 11.97%.

At the same time, the incorporation of these two BDCs helps us to enhance the portfolio's risk profile: while Ares Capital's 24M Beta Factor is 0.81, BlackRock TCP Capital's is 0.60, thus bolstering the portfolio's stability.

The continuous reduction of your portfolio's risk level is crucial for investment success over the long term, as I mentioned in a previous portfolio allocation article :

It is worth noting that regularly reviewing our investment portfolio is important to prevent any individual position with a high risk level from dominating the overall investment portfolio. Such a dominance would increase the risk level for us investors, and would reduce the likeliness of achieving attractive investment results over the long term. By not overweighting those companies that come attached to a high risk level, we further ensure to decrease the likelihood of losing money in a short period of time when investing.

Due to the incorporation of these two BDCs, the Weighted Average Dividend Yield [TTM] of The Dividend Income Accelerator Portfolio has been augmented to 4.49%. Before their incorporation, the Weighted Average Dividend Yield [TTM] of The Dividend Income Accelerator Portfolio was at 3.83%, underlying the strategic importance of these two picks for The Dividend Income Accelerator Portfolio.

The portfolio's Weighted Average Dividend Growth Rate [CAGR] over the past 5 years now stands at 9.33% (it was at 10.15% before their incorporation).

These metrics indicate that The Dividend Income Accelerator Portfolio provides investors with a significant income stream and offers an attractive (dividend) growth perspective at the same time, ideal for those investors aiming to combine dividend income and dividend growth.

It is also worth highlighting that Bank of America Corporation ( BAC ) and Apple Inc. ( AAPL ) represent the largest individual positions of The Dividend Income Accelerator Portfolio after the inclusion of Ares Capital and BlackRock TCP Capital, accounting for 5.40% (Bank of America) and 5.28% (Apple) of the overall portfolio.

By providing Bank of America and Apple with the highest proportion of the overall portfolio, we continue to ensure that the portfolio is optimized in terms of risk and reward. I believe that an investment in both companies comes attached to a relatively low-risk level, while providing us with the chance to strive for attractive investment outcomes.

Ares Capital

Ares Capital is a business development company that was founded in 2004. Today, the company has a Market Capitalization of $10.80B.

Currently, I consider Ares Capital to be fairly valued. The company's current Market Price is only 3.53% higher than its Net Asset Value ((NAV)). Moreover, its current Dividend Yield [TTM] is at 9.77%, surpassing its average from the past 5 years (which is 9.20%). These metrics also suggest that Ares Capital is at least fairly valued.

I am convinced that Ares Capital represents an excellent pick for dividend income investors that are simultaneously in pursuit of dividend growth, aligning with the investment approach of The Dividend Income Accelerator Portfolio. The company's Dividend Yield [FWD] of 9.77% in combination with its 5 Year Dividend Growth Rate [CAGR] of 4.65% underscore this theory. Ares Capital's Payout Ratio of 80.67% further indicates that its dividend should be relatively safe within the coming years.

When compared to Main Street Capital ( MAIN ), which has recently been incorporated into The Dividend Income Accelerator Portfolio, it can be highlighted that Ares Capital has a slightly higher Dividend Yield [TTM] (9.77% compared to 6.76%) and shows a slightly higher Dividend Growth Rate [CAGR] over the past 5 years (4.65% compared to 3.51%).

You can find an article here , in which I explained the reasons for adding Main Street Capital to The Dividend Income Accelerator Portfolio.

The attractiveness of Ares Capital's Dividend is further underscored when having a look at the company's Consensus Dividend Estimates. Analysts project a rising trajectory for Ares Capital's Dividends, with estimates of 10.01% for 2023, 10.18% for 2024, and 10.21% for 2025.

Below you can find the projection of Ares Capital's Dividend and Yield on Cost when assuming an Average Dividend Growth Rate [CAGR] of 2% for the following 30 years (which is based on the company's Average Dividend Growth Rate [CAGR] of 2.36% over the past 10 years).

The illustration emphasizes that Ares Capital is a compelling choice for investors seeking dividend income.

The graphic below shows the projection of Ares Capital's Dividend per Share and its accumulated Yield on Cost when assuming an Average Dividend Growth Rate of 2% for the following 30 years. This implies that you could be able to recoup your initial investment through dividends by 2032 (while not including withholding taxes in this calculation). The graphic has strengthened my belief that Ares Capital is an excellent addition for The Dividend Income Accelerator Portfolio.

Moreover, it is worth noting that Ares Capital showcases robust growth prospects. This is underscored by the company's Revenue Growth Rate [FWD] of 14.81%, which is significantly above the Sector Median of 5.15%, as well as its EBIT Growth [YoY] of 28.71%, substantially exceeding the Sector Median (15.54%).

The Seeking Alpha Dividend Grades reinforce my conviction that Ares Capital is a superior choice for dividend income investors: the company earns an A rating for Dividend Growth and Dividend Yield, and a B- rating for Dividend Consistency.

BlackRock TCP Capital

BlackRock TCP Capital is a Business Development Company with a current Market Capitalization of $656.24M.

At the company's current share price of $11.20, BlackRock TCP Capital pays a Dividend Yield [FWD] of 11.97%. BlackRock TCP Capital's Payout Ratio stands at 73.56%, leaving room for future dividend enhancements.

BlackRock TCP Capital's Dividend Yield [TTM] of 11.62% is above the one of Blue Owl Capital Corporation ( OBDC ) (Dividend Yield [TTM] of 9.44%) and Main Street Capital (6.76%), highlighting that it is an attractive pick for dividend income investors.

At BlackRock TCP Capital's current price level, I consider it to be undervalued. The company's current price per share of $11.36 stands 10.69% below its Net Asset Value ((NAV)). My theory that BlackRock TCP Capital is undervalued is further underscored by the fact that its Dividend Yield [TTM] of 11.62% stands slightly above the average from the past 5 years (10.75%).

In terms of growth, the company also exhibits exceptional metrics: it shows a Revenue Growth Rate [YoY] of 18.27%, which is 182.68% above the Sector Median, and an EBIT Growth Rate [YoY] of 24.66%, which surpasses the Sector Median by 58.69%.

The Seeking Alpha Quant Ranking underlines BlackRock TCP Capital's attractiveness relative to its peers: BlackRock TCP Capital is ranked 9th out of 94 within the Asset Management and Custody Banks Industry, 39th out of 700 within the Financials Sector, and 211th out of 4644 within the Overall Ranking.

The Seeking Alpha Factor Grades bolster my confidence that BlackRock TCP Capital is an excellent choice for The Dividend Income Accelerator Portfolio: the company receives an A+ rating for Valuation and Revisions, an A rating for Profitability, and a B+ rating for Growth.

Why Ares Capital and BlackRock TCP Capital align with the investment approach of The Dividend Income Accelerator Portfolio

• Both Ares Capital and BlackRock TCP Capital offer investors an attractive Dividend Yield: while Ares Capital boasts a Dividend Yield [FWD] of 9.77%, BlackRock TCP Capital's is 11.97%. This means that both companies contribute significantly to the generation of income, a key objective of The Dividend Income Accelerator Portfolio.
• Both companies exhibit a Payout Ratio, which leaves room for future dividend enhancements: while Ares Capital's Payout Ratio is 80.67%, BlackRock TCP Capital's is 73.56%.
• The companies' Payout Ratios increase my confidence in the sustainability of their dividends. This aligns with the investment approach of The Dividend Income Accelerator Portfolio to prioritize companies that distribute reliable dividends.
• Both Ares Capital and BlackRock TCP Capital boast a 24M Beta Factor below 1 (0.81, and 0.60 respectively), suggesting that their incorporation contributes to lowering the volatility and overall risk profile of The Dividend Income Accelerator Portfolio.
• Both companies exhibit robust growth indicators. Ares Capital presents an EPS Diluted Growth Rate [FWD] of 4.94%, and BlackRock TCP Capital reports 12.23%. These metrics reinforce my conviction that both are on track in terms of growth, strengthening my belief that they will be able to raise their dividend payments in the years ahead.

Investor Benefits of The Dividend Income Accelerator Portfolio after Investing $100 in Ares Capital and $100 in BlackRock TCP Capital

By incorporating both Ares Capital and BlackRock TCP Capital into The Dividend Income Accelerator Portfolio, we have successfully elevated the portfolio's Weighted Average Dividend Yield [TTM] to 4.49%.

When evaluating the current Weighted Average Dividend Yield of The Dividend Income Accelerator Portfolio against the potential yield from bond investments, it is worth highlighting insights from a previous portfolio allocation article :

The selected dividend paying companies are expected to provide sustainable dividends, meaning that these dividend payments will increase year over year. Moreover, always keep in mind that the Total Return of your investment comprises both dividends and capital gains. In the long run, I expect this Total Return of the dividend portfolio I have presented in this article to be above the interest offered by most bonds.

It is further worth mentioning that through the inclusion of Ares Capital and BlackRock TCP Capital into The Dividend Income Accelerator Portfolio, the portfolio's Weighted Average Dividend Growth Rate [CAGR] over the past 5 years now stands at 9.33% (it was at 10.15% before their incorporation).

In addition to that, we have successfully managed to reduce the volatility and risk profile of The Dividend Income Accelerator Portfolio. This is evidenced by the company's 24M Beta Factor of 0.81 (Ares Capital) and 0.60 (BlackRock TCP Capital), making the portfolio even more suitable for any market conditions.

It is also worth noting that after the incorporation of Ares Capital and BlackRock TCP Capital, Bank of America and Apple are the largest individual positions of The Dividend Income Accelerator Portfolio. While Bank of America currently represents 5.40% of the overall portfolio, Apple accounts for 5.28%.

The reason for which both currently account for the largest positions of The Dividend Income Accelerator Portfolio is their robust performance since their acquisition. Bank of America has shown a positive return of 9.8%, and Apple has posted a performance of 7.42%.

With the incorporation of additional companies into The Dividend Income Accelerator Portfolio, I also plan to add additional Apple shares in the coming months. I plan to overweight the Apple position in this portfolio due to the company's excellent risk/reward profile.

Below you can find an overview of the positions of The Dividend Income Accelerator Portfolio after the incorporation of Ares Capital and BlackRock TCP Capital.

Conclusion

Through the strategic incorporation of Ares Capital and BlackRock TCP Capital, we have raised the Weighted Average Dividend Yield [TTM] of The Dividend Income Accelerator Portfolio to 4.49%.

These incorporations substantially boost the portfolio's potential to generate income for you as an investor, making The Dividend Income Accelerator Portfolio even more attractive for investors seeking to amplify their income streams. Through the significant generation of income via dividends, we ensure to maintain our holdings without needing to liquidate positions of our portfolio, aligning with the buy-and-hold approach of The Dividend Income Accelerator Portfolio.

Imagine enjoying the next match of your beloved football, basketball, or baseball team funded by dividends from companies such as Ares Capital and BlackRock TCP Capital or from Bank of America and Apple. The latter companies were recently added to The Dividend Income Accelerator Portfolio and currently represent the largest individual positions (while Bank of America currently makes up 5.40% of the portfolio, Apple represents 5.28%). Such a scenario is a tangible benefit from a well-curated portfolio designed to amplify your dividend income.

I am convinced that the portfolio has been strategically optimized to deliver significant income via dividends, further augmented by the incorporation of these two Business Development Companies [BDCs] Ares Capital and BlackRock TCP Capital.

At the same time, the portfolio offers an attractive risk/reward profile, since companies like Bank of America and Apple, that I consider to be most attractive in terms of risk and reward, account for the largest proportion.

With the implementation of The Dividend Income Accelerator Portfolio, you can steadily increase your wealth through a broadly diversified dividend income investment approach while mitigating risks. At the same time, the Dividend Income Accelerator Portfolio remains committed to its long-term investment approach while helping you achieve an attractive Total Return.

Author's Note: Thank you for reading! I would appreciate hearing your opinion on my selection of Ares Capital & BlackRock TCP Capital as the 11th and 12th acquisition for The Dividend Income Accelerator Portfolio. Feel free to share any thoughts about The Dividend Income Accelerator Portfolio or to share any suggestions of companies that would fit into the portfolio's investment approach!

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