Last year, I reviewed the dividend safety of Ares Capital Corp. (Nasdaq: ARCC). At the time, shares of the business development company (BDC) yielded 8.7%. I gave the stock a “B” for dividend safety.

Today, the yield is 10% due to a decline in the stock price and an increase in the dividend. Ten percent is high for a dividend yield.

But can investors rely on a double-digit dividend yield?

In 2022, Ares Capital generated $1.1 billion in net investment income (NII), up from $741 million the year before. BDCs lend money to and invest in other companies, so NII is the metric we look at to determine whether a BDC can continue to pay its dividend.

Against the $1.1 billion in NII, Ares Capital paid shareholders $912 million in dividends, for an 84% payout ratio. BDCs typically pay 90% or more of their profits in dividends, so I’m comfortable with any number below 100%.

There is no estimate for NII this year, but dividends paid should be around $1.1 billion. So as long as NII doesn’t go backward, Ares Capital should be able to afford the dividend.

For a few years, Ares Capital paid a regular quarterly dividend and a special dividend. In 2022, it paid a $0.03 per share special dividend each quarter. This year, it has not paid a special dividend, but I consider only regular dividends in my dividend safety calculations anyway. If Ares Capital pays a special dividend, that’s a bonus for shareholders.

Ares Capital doesn’t raise its dividend every year, but it has boosted it four times in the past four years, after several years of keeping it steady.

The last time the company lowered its dividend was in 2009. The statute of limitations has run out on that cut, as Safety Net considers only the last 10 years.

So we have a company that has a very good 10-year track record and generates enough NII to afford its dividend. Though the yield is in the double digits, I don’t believe investors have to worry about their regular dividend being cut anytime soon.

Dividend Safety Rating: A

— Marc Lichtenfeld

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Source: Wealthy Retirement