Discovering this High-Dividend-Yield Titan, Hidden in Warren Buffett's Concealed Portfolio, is an Intelligent Purchase Opportunity
In Berkshire Hathaway's (BRK.A 0.24%, BRK.B 0.14%) quarterly 13-F filings, the only stock touting an ultra-high dividend yield is Kraft Heinz. My definition of ultra-high yield equates to four times the yield of the S&P 500. Currently, a forward dividend yield of approximately 4.92% is needed to meet this criterion.
However, Buffett and Berkshire Hathaway maintain stakes in additional stocks beyond these disclosed filings. Hidden within Buffett's "secret portfolio," at least one ultra-high-yield dividend stock offers a compelling investment opportunity.
An intriguing prospect
There's nothing underhanded about Buffett's "secret portfolio." In actuality, while many remain unaware, the portfolio is far from clandestine.
In 1998, Berkshire Hathaway acquired reinsurance company General Re. Three years prior, General Re acquired New England Asset Management (NEAM). NEAM offers asset management services to the insurance industry, managing a separate portfolio apart from Berkshire Hathaway's. Like its parent company, NEAM discloses its holdings each quarter.
NEAM's portfolio boasts several dividend-paying stocks falling under my ultra-high-yield definition. I consider several of these my top picks, and I personally own several. Ares Capital (ARCC -0.28%) ranks particularly high among my choices.
Ares Capital functions as a leading business development company (BDC). It lends directly to middle-market businesses that generate annual revenues between $10 million and $1 billion. NEAM (and, by extension, Buffett and Berkshire) owns roughly 225,900 shares of Ares Capital, worth around $4.9 million.
Why Ares Capital is a no-brainer investment
The first standout feature of Ares Capital is its jaw-dropping forward dividend yield of 8.9%. This impressive yield is dictated by the 90% of earnings that Ares Capital is required to distribute to shareholders as dividends, as a BDC. With the exception of 2020, when COVID-19 caused a brief interruption, the company's earnings have remained robust in recent years.
I laud the diversification in Ares Capital's $25.9 billion portfolio. During the third quarter of 2024, its largest investment accounted for just 1.7% of its total portfolio. Its top 10 investments accounted for only 11.3% of the total. Moreover, no single industry represented over 25% of Ares Capital's portfolio.
Crucially, Ares Capital mainly finances sound companies with strong management teams. It exerts particular focus on businesses in resilient, non-cyclical industries.
Ares Capital's financial stability is unwavering, thanks to its unblemished access to capital—an indispensable prerequisite for a BDC. Boasting investment-grade credit ratings with positive-to-stable outlooks from leading credit rating agencies, Ares has established relationships with 43 banks and more than 250 investors in capital markets. Currently, Ares holds $5.8 billion in readily available liquidity.
Ares Capital's success speaks volumes. Since its inauguration in 2004, the company's total return has surpassed 1,000%, surpassing the total return of the S&P 500 (approximately 680%) during the same period. This equates to an annualized total return of around 13%. Over the past ten years, Ares has hiked its dividend by 26.3%, outperforming all other externally managed BDCs with a market cap over $700 million, both publicly traded and operating throughout the entire period.
Primary risks
Although I strongly believe that Ares Capital is a no-brainer buy for numerous investors, the company isn't without challenges. Ares Capital's use of leverage (leveraging borrowed money to boost returns) is one vulnerability.
Another concern involves the possibility of Ares Capital's clients failing to repay their loans. This is an inherent risk associated with operating as a BDC. Despite this, I believe that Ares Capital's extensive portfolio diversification and stringent investment criteria help curb this risk significantly.
There's also the real prospect of capital markets encountering disruptions. Situations such as wars, epidemics, pandemics, skyrocketing inflation, or surging interest rates could pose challenges for Ares Capital's operations. Nonetheless, the company has proven adept at navigating such difficulties in the past.
Given the text, here are two sentences that contain the words ['money', 'investing', 'finance']:
- Berkshire Hathaway's significant investment in Ares Capital, a leading BDC with a jaw-dropping forward dividend yield of 8.9%, offers a compelling investment opportunity for those seeking high yields in their finance portfolio.
- The finance industry recognizes Ares Capital's success, as evidenced by its robust earnings in recent years, surpassing 1,000% in total return since its inception in 2004, making it an attractive option for investors looking to diversify their money in the realm of high-yield investments.
