Ares Capital Corporation (NASDAQ: ARCC) is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.

Company Overview

• Market Cap: 10.457 billion
• PE Ratio: 1.06
• EPS: 1.19
• Dividend Yield: 9.76%

Ares Capital provides investors with a dividend yield of 9.76%. That’s by far the highest yield of any stock owned by NEAM or owned directly by Berkshire Hathaway. How can Ares Capital pay such a big dividend? For one thing, it’s a business development company (BDC). Like real estate investment trusts, BDCs must return at least 90% of their taxable income to shareholders as dividends.

Ares continues to generate plenty of profits to hand over to its shareholders. And it’s able to do so for a couple of key reasons. First, the company manages risk very effectively. Ares’ portfolio is much more diversified than most other BDCs, with less exposure to highly volatile segments. Second, the company benefits from banks pulling away from middle-market lending. This trend has created demand for BDCs — especially well-respected leaders like Ares.

The company doesn’t think defaults will increase significantly enough to hurt Ares Capital this year, CEO Kipp DeVeer said in the latest quarterly update that Ares expects a cycle where defaults could rise but not exceed historic averages.