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I’m addicted to this 10% dividend. Should I quit?
Published about 5 hours ago • 6 min read
I think I might be addicted to a dividend.
Nobody needs to stage an intervention, but I own a stock that pays about 10%, and every time I think about selling it, I find a reason not to.
And lately I've been wondering if the reason is just... Loving watching that money roll in every 90 days!
What got me thinking about all this was when Ares Capital (ARCC) reported earnings, and on top of that, they announced they're buying another company called MidCap Financial (MFIC) in a deal worth about $2.6 billion.
When ARCC went public in 2004, three big dog BDCs were in its world: Allied Capital, American Capital, and MidCap Financial, which used to be called Apollo Investment. Once this deal closes, ARCC will have bought all three!
It's also not even a huge deal for them, which tells you how big ARCC has gotten. MidCap Financial brings in over 200 more companies they lend to, taking them past 800 borrowers, and only 12 of those companies overlap with what ARCC already has.
New doors, new relationships, less of the combined portfolio in software, and management says it should add a little bit to earnings once the deal closes.
Anyway, I read the earnings report and listened to the whole call, and had to keep looking things up:
"I kind of know what that means. I need to Google that. I have NO idea what that means."
So here's my confession. If the CEO, Kort Schnabel, understands 100% of this company, I'm probably at about 35%. On a good day.
I bought my first shares on December 5th, 2022, at $19.19, and what ARCC does is not complicated at the top level. They lend money to medium-sized companies that are too big for a local bank and too small for Goldman Sachs (GS) or JPMorgan (JPM). They collect the interest, pay their bills, and send most of the rest to the shareholders.
But the loans themselves are a total black box. I can read you the names of the companies they lend to, but have no way to look at their financial statements like a publicly traded company. Nobody on the outside can.
When everybody panicked about software loans and private credit earlier this year, we basically had to take management's word for it that things were mostly fine.
SimplySafeDividends.com
ARCC currently has a 10.05% yield. Dividend safety right in the middle at 50. And my favorite line on the whole thing: dividend growth, 0% since 2022.
Absolutely zero since the year I bought it. Ha!
But ARCC has something pretty crazy that not many people know, and it's great trivia for stock nerds.
ARCC went public in 2004 at $14.93 a share. The other day it was around $18.53. That is $3.60 of growth. In 22 years. Big old bucket of yuck, right?🤮
But it paid out $35.64 a share in dividends in that time. If you had reinvested every one of those dividends back into ARCC, you actually would have beaten the S&P 500 over those 22 years.
If you spent the dividends (and didn't account for taxes or what you spent them on), ARCC got beaten worse than the Chicago Bulls without Michael Jordan! The dividend did everything for ARCC — but only if you kept putting it back to work.
Dividendchannel.com
There’s a fantastic book that advocates for exactly this, and it's called The Income Factory, by Steven Bavaria.
His whole idea is simple. When you get a job, what's the first thing everybody asks? “How much does it pay?”
The salary IS the point.
Bavaria says, why not treat a portfolio the same way? Buy things for the income they throw off. Like having your own personal money-making factory.
But what’s tough to hear is that he’s fine with the fact that a lot of these high-yield companies will cut their dividend someday.
It happens. They go in cycles. Rates move, somebody has a bad year, and the dividend gets cut.
His point is, a cut is not automatically the end of the world. If the price drops and you're reinvesting, your dividends buy more shares while they're cheap. Your share count goes up faster. And when the cycle turns, and the company starts raising the dividend again, your income factory owns more shares to pay you with.
I don’t follow his plan perfectly, because Bavaria would probably reinvest right back into the same stock. I used to, but don't anymore.
ARCC's dividends go into other things now. So maybe I'm only running half of his factory. The ARCC half just sits there making parts that I ship over to the other half.
Which brings me to the other half.
The other income stocks I own a lot of, like Agree Realty (ADC), are much easier for me to understand.
They own buildings and land that companies like Aldi, Home Depot (HD), Starbucks (SBUX), and Costco (COST) rent.
The deal is called a triple net lease, which means the tenant pays for pretty much everything. Taxes, insurance, fixing the roof. ADC just collects the rent check and passes most of it on to the shareholders.
Investopedia.com
And if Aldi ever left, it's just a big empty fungible rectangle, and somebody else would rent the rectangle. Which is why Joey Agree loves fungible rectangles.
It’s a bit more difficult to drive by ARCC’s loans…
ARCC Top 15 Investments
I tell people all the time, never buy a stock just for the dividend. And this week I sat here asking myself if that's exactly what I did.
I don't think it is. Buying just for the dividend is seeing a 10%+ yield, knowing nothing about who or what is behind it, and jumping straight in.
I knew this was an income stock and that the price would probably be flatter than Florida. I knew the dividend might rarely grow and could even get cut someday.
Right now ARCC pays out about everything it earns, so there's not much wiggle room, and I’m monitoring it. Green is net investment income per share. Red is the dividend. Last quarter: $0.46 earned, $0.48 paid.
ARCC NII Not Covering Dividend
So am I quitting ARCC and its delicious dividend cold turkey?
No.
Current Investment Portfolio
It's less than 2% of everything in our investment portfolio, not including 529's, home equity, etc. If ARCC went to zero tomorrow, it would sting, but it wouldn’t cripple us financially.
And I think it’s sized like something I only understand 35% of too.
So the plan is to stay boring. ARCC pays its flat paycheck every quarter, which buys more ADC and more VICI Properties, where the paychecks actually grow a little every year.
The ARCC buying is paused indefinitely, and every quarter, without me doing anything dramatic, ARCC becomes a slightly smaller slice of the pie.
Peter Lynch had a line I've heard a million times. "Know what you own, and know why you own it."
I understand about 35% of ARCC, so it's less than 2% of my portfolio.
Now I'm curious about you. What's the highest yield in your portfolio? And if you had to put a percentage on how much of it you understand... what would you say?
Hit reply and let me know!
— Russ
This is just me thinking out loud about my own money. It's not advice for yours.
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