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It's basically a company that lends money to other businesses and pays us dividends from the profits they make. Think of it like being a bank, but for medium-sized companies.
Investors are selling because the Fed is cutting interest rates, so people think ARCC will make less money and pay smaller dividends and the stock has been falling hard.
But, from 2008-2015, we had basically zero interest rates for 7 years straight. You know what happened to ARCC? It went up 670% while the regular stock market only went up 197%.
So this whole "low rates hurt BDCs" fear? History says otherwise.
ARCC has $1.29 per share in backup "spillover" money they can use to keep paying dividends even if income drops. Plus they lend to 550+ different companies, so it's spread out. And most of their loans have minimum payment floors - even if rates hit zero.
Right now ARCC pays about 9.4% in dividends. That means every $1,000 I put in gives me $94 back each year just for holding it.
When the stock price falls but the company stays solid, I get a higher yield. It's like buying the same thing on sale.
Everyone's selling based on fear about what MIGHT happen. I'm buying based on what HAS happened before. Plus I like getting paid that 9.4% while I wait to see who's right.
Is it risky? Yes. But I'm only putting a small chunk of my money here, (less than 4% of my portfolio).
Bottom line: Don't put all your money in these things, and don't invest money you need in the next few years. But if you understand what you own and why you own it - income first, capital appreciation second - then falling prices might be an opportunity, not a disaster.
That's my thinking anyway. Not advice, just what this welder decided to do.
What do you think? Hit reply and tell me if you invest in any BDCs like Ares!
Disclaimer: This is not investment advice, just one person's opinion that may be incorrect. Do your own research before making any investment decisions.
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Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
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