A lot of people get hung up on labels.
It’s this thing or that thing.
This way or that way.
But in investing, there’s really no need for labels.
Almost every investor has the same goal – to make money and become financially independent.
And that’s why dividend growth investing is such a popular and effective strategy.
This is a long-term investment strategy whereby one buys and holds shares in world-class businesses paying out safe, growing dividends to shareholders.
You can find hundreds of examples by pulling up the Dividend Champions, Contenders, and Challengers list.
That list has curated data on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
And those growing dividends?
They’re a fantastic source of (growing) passive income necessary to cover the (growing) bills and unlock financial freedom.
I’ve used this strategy for myself over the past 15 years.
In doing so, I’ve built the FIRE Fund – my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
Indeed, this strategy did unlock financial freedom for me, allowing me to retire in my early 30s.
If you’re curious about how that’s possible, be sure to read my Early Retirement Blueprint (it spills the beans).
Now, as effective as dividend growth investing is, it does involve more than just investing in great businesses.
And that’s because price is only what you pay, but value is ultimately what you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
All of this valuation talk may seem intimidating.
If it seems that way, I’d recommend checking out Lesson 11: Valuation.
Fellow contributor Dave Van Knapp put that together as part of a greater series of “lessons” designed to teach the DGI strategy, and it discusses the ins and outs of valuation using simple terminology to help familiarize anyone with the concept.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Ares Management Corp. (ARES) is a US-based global alternative investment manager.
Founded in 1997, Ares Management is now a $33 billion (by market cap) alt asset giant employing nearly 4,000 people.
Ares Management finished FY 2025 with just over $622 billion in AUM – up 29% from about $484 billion in the prior year.
The company manages this AUM across four primary verticals: Credit (65%), Real Assets (22%), Secondaries (7%), and Private Equity (4%).
The company accumulates capital from well-heeled investors and then invests that capital (as well as its own capital) across those main verticals, charging fees and earning performance-based carried interest in the process.
In addition, the company generates income and gains from its various credit and equity investments on top of the direct fees.
This fee/return one-two punch is a powerful way to take advantage of two secular trends.
The first one is, there are more and more large entities out there (such as sovereign wealth funds) that have growing piles of capital looking for returns in a world where public options are shrinking.
The second one is, global assets are compounding over time as effects such as inflation, technologies, and a growing human population propel the world to greater heights.
Ares Management is tapping into both, growing its AUM, fees, and returns in the process of doing so.
And that should lead to more revenue, profit, and dividends over time.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To date, Ares Management has increased its dividend for seven consecutive years.
It’s a short track record, likely giving pause to more conservative investors looking for proof of long-term durability, but Ares Management has gotten off to an impressive start.
Wow.
As astounding as that is all by itself, what makes it especially incredible is the fact that the stock also yields 5.1%.
How often you do you see a 5%+ yield and 20%+ dividend growth?
Almost never.
This yield, by the way, is a staggering 250 basis points higher than its own five-year average, giving us an early indication that something is either opportunistic or awry.
Of course, circling back around to that durability, the big question is whether or not Ares Management can keep it up.
Notably, the payout ratio, using after-tax realized income per share (arguably the best way to measure per-share profit for this firm), is slightly over 100%.
Using GAAP EPS, it’s far higher.
This is a dangerously high payout ratio, meaning a sudden and sizable drop in the company’s AUM, fees, and income could lead to a swift dividend cut.
There’s just no margin of safety, to my eye.
Honestly, I think Ares Management should have been a bit more judicious with the dividend raises over the last several years and built up a better cushion.
Nonetheless, if the company is able to navigate this, kudos to them.
Assuming the dividend remains intact, this is one of the most lucrative dividend setups I know of.
Revenue and Earnings Growth
As lucrative as it may be, though, much of this is mainly based on past information.
However, investors must always be anticipating future information, as today’s capital is risked for tomorrow’s rewards.
That’s why I’ll now build out a forward-looking growth trajectory for the business, which will be of use when the time comes to estimate intrinsic value.
I’ll first show you what the business has done over the last five years in terms of its top-line and bottom-line growth.
I’ll then reveal a professional prognostication for near-term profit growth.
Blending the proven past with a future forecast in this manner should give us the ability to reasonably judge where the business could be going from here.
While I usually show a decade’s worth of growth, I’m only using five years in this case because Ares Management converted from an LP to a corporation not long before the pandemic, and then the pandemic shortly thereafter caused huge fluctuations in numbers.
Ares Management advanced its revenue from $4.2 billion in FY 2021 to $5.6 billion in FY 2025.
That’s a compound annual growth rate of 7.5%.
Very solid top-line growth here.
Meanwhile, after-tax realized income per share grew from $2.57 to $4.76 over this period, which is a CAGR of 16.7%.
Excellent bottom-line growth (although we can see that dividend growth has exceeded this).
Notably, this occurred even in the face of substantial dilution, with the outstanding share count expanding by more than 20% over this short time frame.
Ares Management has been a beneficiary of post-pandemic liquidity, as well as an explosion in popularity for private capital.
As companies have sought alternative funding sources, players like Ares Management have stepped in.
And as institutional investors from around the world have looked for big returns and met that demand with supply, Ares Management has been a beneficiary of this via inflows.
Will it continue?
CFRA is forecasting a 20% compound annual growth rate for Ares Management’s EPS over the next three years.
I’m assuming CFRA is referring to after-tax realized income per share here.
To my surprise, CFRA is clearly anticipating an acceleration in Ares Management’s bottom-line growth.
CFRA’s enthusiasm stems from a secular shift from bank lending to private credit, as well as strong fundraising and the general increase in demand for alternative assets.
That last part is interesting, and I think a case could be made that there’s also a secular shift from traditional asset management (i.e., companies that park capital in mutual funds) to alternative asset managers like Ares Management.
That’d be two secular tailwinds at play.
Moreover, there are really only so many places that large sums of capital can go in order to access many of the verticals that Ares Management provides.
Speaking more on the traditional-to-alt secular shift at play, while traditional asset managers are registering persistent outflows, Ares Management recorded $107.7 billion in net inflows for FY 2025.
Inflows helped to bring its AUM up to $622.5 billion at the end of 2025 – a 29% YOY increase.
Now, recently, private credit has been dogged by negative headlines around AI-induced risks (particularly around software), poor underwriting standards, widespread losses, and liquidity concerns.
CFRA does note that only 6% of Ares Management’s AUM is tied to software.
And seeing losses in private credit shouldn’t be a shock.
Any credit has risk of losses, write-downs, frauds, etc.
Still, it’s worth pointing out that CFRA cut its price target on this stock by nearly 12% recently, highlighting the difficulty of mapping out the trajectory of this kind of firm.
I’m personally much more cautious on this whole complex, and I think it’s sensible to assume growth closer to a HSD-LDD level from here.
When the dispersion of possible future outcomes is wider, I respond by being more conservative with my starting assumptions.
After all, those negative headlines can become a self-fulfilling prophecy whereby fickle investors become fearful, leading to less inflows and negatively impacting Ares Management’s AUM and fees.
Also, I believe the last few years were anomalous in certain ways relating to capital, liquidity, asset shifts, etc.
I just find it very hard to believe that Ares Management will put up even better numbers over the next few years and grow at 20% annually.
The environment has shifted too much.
But even a 10% bottom-line growth rate (half that of what CFRA has in mind) would still leave the door open for MSD dividend growth and a simultaneous compression of the payout ratio (something badly needed here, in my opinion).
When the stock is already yielding over 5% to start with, that’s actually quite acceptable.
No need to be greedy.
I think it’s also worth noting here that the co-founders are still very much engaged with Ares Management, combining to own a significant (30%+) ownership stake, voting power, and key management positions (including CEO).
The co-founders are highly interested, personally and financially, in making sure Ares Management succeeds, and I think this “skin in the game” aligns well with common shareholders and bodes well.
Financial Position
Moving over to the balance sheet, Ares Management has a complicated but apparently good financial position.
This company has a very complex balance sheet, but I’m not seeing any major red flags.
If we look at debt obligations at the company level against shareholders’ equity, the ratio is 0.9.
Not excellent, but not worrisome.
Ares Management does have investment-grade credit ratings: A-, Fitch; BBB+, S&P.
That S&P rating, which is quite solid, is reassuring.
Also, Ares Management is a member of the prestigious S&P 500, so this isn’t some backwater asset management firm.
Profitability is, unfortunately, almost impossible to reliably measure in this case, as it translates profits very differently in comparison to the average company.
Instead, it’s more informative to track inflows, AUM, fees, and after-tax realized income per share.
Overall, this is an interesting high-yield idea, particularly if one believes in the secular shift to private credit.
And with scale, reputational value built on a demonstrated track record, built-up relationship, industry know-how, and diversified offerings, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
The very business model might be the biggest risk of all, as lending inherently involves massive risks around losses stemming from poor underwriting standards, frauds, industry changes, etc.
Recent headlines around private credit have been very negative; this can feed on itself and result in outflows, falling AUM, fee compression, etc.
Ares Management relies on its reputation as a go-to firm for institutional and high-net-worth investors, and any damage to this reputation could be catastrophic.
The company must continue to prudently invest across its verticals, as extended periods of losses would result in a loss of confidence among its investors (which would then likely result in outflows).
Values across its assets and verticals are opaque, and liquidity is often limited at any given time, so any sudden drop in investor confidence in public or private markets could negatively and suddenly impact Ares Management.
A prolonged downturn in global markets would almost certainly bleed through into lower AUM and fees for Ares Management, as well as possible large-scale redemptions and outflows.
Its verticals are highly cyclical, making these assets and the firm susceptible to widespread economic weakness.
Being a global firm, Ares Management is exposed to geopolitics and exchange rates.
The risk profile here strikes me as being quite elevated relative to the average business, so I think the entry point has to be even more carefully considered than usual.
Fortunately, with the stock down a jaw-dropping 50% from highs reached just over a year ago, the entry point has become much more favorable after a serious reduction in the valuation…
Valuation
The stock is now available for a P/E ratio of 22.3, using after-tax realized income per share in lieu of GAAP EPS.
While not a rock-bottom type of multiple, it’s well below the 30s to 40s the stock has typically commanded over the last several years.
In my view, this reveals a stock that moved from way too expensive in the past to a level that’s much more reasonable now.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 5%.
My projected dividend growth rate is well below what Ares Management has demonstrated to date, but I think the caution is justified.
This is in accordance with what I noted above in terms of expecting something closer to 10% on bottom-line growth which would then open up the dividend for mid-single-digit growth (in order to lower that high payout ratio).
Coming into an alternative asset manager with sky-high expectations and swallowing sky-high multiples is what got the people who bought this stock at nearly $200 not long ago into trouble.
I think you approach something like this with care, caution, and low expectations.
While it’s possible that Ares Management fails to even deliver 5% dividend growth from here, as the payout ratio does leave little room for margin of error, I think it’s at least setting the bar low enough to get a sensible grasp on what to pay.
The DDM analysis gives me a fair value of $113.40.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
My model shows a stock that looks decently valued after a much-needed epic crash boiled off some froth.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates ARES as a 4-star stock, with a fair value estimate of $135.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates ARES as a 4-star “BUY”, with a 12-month target price of $160.00.
I came out low, perhaps due to some modest cynicism regarding this whole space, but we all agree on the valuation looking a lot better after the crash. Averaging the three numbers out gives us a final valuation of $136.13, which would indicate the stock is possibly 22% undervalued.
-Jason Fieber
Note from D&I:How safe is ARES’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 60. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, ARES’s dividend appears Very Safewith a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in ARES.