The Best Of Both Worlds: How I Combine Income And Growth For Elite Long-Term Returns

Introduction Ever since I started writing financial articles, choosing between income and growth has been a challenge. Some investors buy stocks for income, while others are still in the process of building wealth. And then there’s anyone in between. To make matters more challenging, definitions vary. For some, 3% to 4% income is enough to retire. Others won’t call anything an income opportunity unless it yields 7% or more. We’ll never find an answer to this debate, which is why I will cover the entire range of (dividend) stocks, including fast-growing players and those with little growth but a big payout. It’s like a menu in a restaurant, you just pick what you like. Or a buffet, for that matter.  Today, I’m doing things a bit differently, as I will give you a combo.  If we focus entirely on the growth vs income binary, we miss what I consider one of the most powerful combinations in the alternative asset space. Basically, over the past decade, investors either bought fast-growing asset managers or put their capital into higher-yielding Business Development Companies. Some wanted growth, others wanted income.  Personally, I made the mistake of avoiding this space altogether, as I simply disliked companies that operate in the lending business. While I have always said that there are good players, buying companies in the competitive and cyclical lending space wasn’t for me. While it’s cyclical and competitive, I simply made the mistake of being lazy and not focusing on just how great some of these companies are. I changed that mindset last year.  To me, there are “winners” and “tourists” in this space. The tourists are the ones who simply want to play the game and somehow hope the spread between lending and borrowing allows them to be profitable. The winners are the ones who have perfected finding the balance between risk and opportunity.  Even better, if we buy both asset managers and their lending vehicles, we can create an environment of income and growth.  That’s what this article is about, as I present Ares Management (ARES) and its subsidiary Ares Capital Corp. (ARCC) . So, let’s get to it! The Empire & The Fortress I have to admit that I could have chosen a lot of combos in the private credit space. Picking two companies that both operate under the Ares umbrella was a deliberate choice because of the way Ares has built a fantastic track record over the past few decades.  For starters, I like Ares Management, which I like to call the empire, as it’s basically the casino and not the gambler. It’s the growth engine that provides capital gains to this growth and income mix.  Ares Management has a $56 billion market cap and a 2.6% yield. Initially, it was what one might call a “credit shop.” Now, it’s a diversified global powerhouse that trades at 70x earnings because of its high-quality fee-related earnings (“FRE”).  Last year, for example, it bought GCP International, which made it a top-three global owner and operator of logistics assets, as it said in the press release . Now, it has close to $600 billion in assets, more than 55 global offices, and a business that includes real assets, private equity, and other alternatives, in addition to its $392 billion credit platform. [Inline image] Source: Ares Management The best thing about this is that Ares Management is now a critical player that finances the world’s needs. Just think about the energy transition, the data center boom, and so many other things that require capital. However, it doesn’t just function as a lender. Essentially, the company connects players who want to put capital to work with organizations that require capital. On these deals, it generates fee-rated income.  In other words, the higher its AUM (that’s assets under management), the higher its FRE.  That’s genius, as the credit risk shifts to investors, not Ares(!). Ares