ARCC - Ares Capital: Attractive For Income Investors Yielding 9.6% Heading Into A Lower Rate Environment

2024-03-24 22:18:44 ET

Summary

• BDCs, including Ares Capital, are expected to do well in a lower-rate environment due to their ability to generate higher returns and dividends compared to risk-free assets.
• ARCC has shown strong financial performance, with a high operating margin and profit margin, and has experienced consistent top-line growth.
• ARCC's dividend track record and stable financials make it an attractive investment option, especially as capital flows back into the markets from money market accounts.

One of the big questions is what will happen to business development corporations ((BDC)) when the Fed starts its rate-cutting cycle. BDCs have become increasingly popular during the rate-hiking cycle as they generate larger returns for their shareholders and higher yields from their distributed income compared to risk-free assets. I think many of the popular BDCs will do well in a lower-rate environment, especially Ares Capital (ARCC), often called the gold standard in the BDC realm. Rates remain at multi-decade highs, and the cutting cycle isn't expected to reach 3% until after 2026 is finished. I don't think now is the time to abandon quality BDCs, especially ARCC. Historically, ARCC has maintained a large dividend throughout different rate environments, and I believe that a rate environment that slowly declines could be beneficial for ARCC as the cost of capital decreases and the opportunity to expand becomes more enticing for lower and middle market companies. I think top-tier BDCs will remain strong income investments and could see an influx of investors as capital flows back into the markets from the sidelines. ARCC may not be as good of a buy today as it was last year, but I am still bullish on ARCC as an income investment and look forward to reinvesting the dividends and increasing my position in 2024....

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