You’ll only find one ultra-high yield dividend stock Berkshire Hathaway‘S (NYSE: BRK.A)(NYSE: BRK.B) quarterly 13-F regulatory filings: Kraft Heinz. By the way, the definition I use for ultra-high yield is four times the yield of the S&P500. To meet that threshold currently would require a future dividend yield of approximately 4.92%.
However, Warren Buffett and Berkshire Hathaway own more shares than their registration documents show. At least one ultra-high-yield dividend stock in Buffett’s “secret portfolio” is a no-brainer purchase right now.
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There’s nothing shady about Buffett’s “secret portfolio.” Although many people are unaware of it, the wallet is actually not much of a secret.
In 1998, Berkshire Hathaway acquired reinsurance company General Re. About three years earlier, General Re purchased New England Asset Management (NEAM). NEAM provides asset management services to the insurance industry and manages a separate portfolio to that of Berkshire Hathaway. Like its parent company, NEAM makes its assets public every quarter.
NEAM’s portfolio includes several stocks that pay dividends that meet my definition of ultra-high yield. I think some of them are such good choices that I own them too. Ares Capital(NASDAQ: ARCC) is one of the best in my opinion.
Ares Capital is a leading business development company (BDC). It invests in and provides direct loans to mid-market companies that generate annual revenues between $10 million and $1 billion. NEAM (and, by extension, Buffett and Berkshire) own 225,900 shares of Ares Capital worth $4.9 million.
The most striking advantage for Ares Capital is the expected dividend yield of 8.9%. Why is this return so high? As a BDC, Ares Capital must distribute at least 90% of its income as dividends to shareholders. With a brief exception in 2020 due to the COVID-19 pandemic, the company’s profits have been solid in recent years.
I like the diversification of Ares Capital’s $25.9 billion portfolio. In the third quarter of 2024, the company’s largest investment made up just 1.7% of the total portfolio. The top 10 investments made up 11.3% of the total. Furthermore, no single sector made up more than 25% of Ares Capital’s portfolio.
Importantly, Ares Capital only provides financing to fundamentally strong companies with good management teams. It focuses primarily on companies in resilient, non-cyclical sectors.
Ares Capital’s own access to capital – a crucial requirement for a BDC – is secure. The company has investment-grade credit ratings with positive to stable outlooks from the leading credit rating agencies. It has relationships with 43 banks and more than 250 investors in the capital markets. Ares currently has $5.8 billion in available liquidity.
The company’s track record speaks for itself. Ares Capital’s total return since its inception in 2004 is over 1,000%, versus a total return of approximately 680% for the S&P 500 over the same period. That translates to an annualized total return of approximately 13%. Over the past decade, Ares has increased its dividend by 26.3% – more than any other externally managed BDC with a market capitalization over $700 million that has been publicly traded during the entire period.
While I think Ares Capital is a no-brainer stock to buy for many investors, the company faces some key risks. The BDC’s occasional use of leverage (borrowing money to increase shareholder returns) tops the list.
Another risk at Ares Capital is that its customers can no longer repay their loans. This is part of operating as a BDC. However, I think the diversification of Ares’ portfolio and the strict criteria for its investments go a long way toward mitigating this risk.
There is also a real possibility that capital markets will be disrupted. Wars, epidemics and pandemics, skyrocketing inflation and/or rising interest rates could cause significant problems for Ares Capital’s business. That said, the company has handled these types of challenges quite well in the past.
Consider the following before purchasing shares in Ares Capital:
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Keith Speights has positions in Ares Capital and Berkshire Hathaway. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
This ultra-high yield dividend stock in Warren Buffett’s secret portfolio is a no-brainer buy and was originally published by The Motley Fool
