The main reason most investors own Ares Capital (NASDAQ: ARCC) is its massive 10% dividend yield. For reference, the S&P 500 index (SNPINDEX: ^GSPC) has a yield of just 1.1%. Before you buy this business development company (BDC), however, you need to step back and make sure you understand just how risky the dividend is.
The ugly truth about Ares Capital’s dividend
If you are looking for a stock with a stable or even slowly growing dividend, you will be highly disappointed with Ares Capital. The dividend history here is very clear: Ares Capital’s dividend rises and falls over time. There is zero reason to expect that to change in the future, with the stock generally following the dividend higher and lower. It all relates back to the company’s core business model.
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As a business development company, Ares Capital makes loans to smaller businesses that lack access to cheaper capital. In the first quarter of 2026, the average interest rate on its loans was a massive 10.3%. That’s how it supports such a huge dividend, but there are negatives to consider here.
For example, interest rate changes will impact the rates it can charge. In fact, many of its loans carry variable rates, so they will adjust higher and lower fairly quickly. That increases dividend risk in a falling-rate environment. Ares Capital benefits when rates rise, but there’s a risk here, too. Smaller companies may have difficulty covering rising interest costs. And if there is a recession, well, financial stress could easily lead to payment troubles among Ares Capital’s customers. In fact, the dividend was trimmed during each of the last two economic downturns.
There is a canary in this coal mine
Ares Capital is basically a public business that invests in private credit. It is designed to pass income on to shareholders, so the dividend will likely be sizable all of the time. However, it will be variable, rising and falling along with the business environment. If you need the income from your portfolio to cover living expenses, it probably won’t be a good fit. But if you can accept some dividend volatility, it is a well-respected BDC.
Understanding this nuance is very important right now. The business news is filled with stories about private credit funds limiting withdrawals, including Blackstone (NYSE: BX), which is doing so for its flagship fund. That’s not an indication the sky is falling, noting that Ares Capital’s non-accrual loans stood at a reasonable 2.1% of its portfolio at the end of the first quarter. There’s really no reason to believe the dividend is at risk right now.
