Ares Capital Has Maintained or Raised Its Dividend for Over 16 Years. Here's What That Streak Is Built On.

Ares Capital (NASDAQ: ARCC), the world's largest business development corporation (BDC), pays a forward dividend yield of 9.8%. That massive yield might initially seem like a red flag, but Ares has actually maintained or raised that payout for 16 consecutive years.

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How does Ares pay such a high yield?

As a BDC, Ares provides financing for "middle market" companies that struggle to secure loans from conventional banks because they're considered higher-risk clients. It's invested in 619 companies across its $29.3 billion portfolio. To reduce its risk, it allocates 59% of its portfolio to first-lien secured loans and 4% to second-lien secured loans.

Ares floating-rate loans track the Fed's benchmark rate. To keep growing, it needs those rates to stay in a "Goldilocks" zone. Higher interest rates boost its net interest income, but they hurt its portfolio companies. Lower rates help those companies, but reduce Ares' own profits.

As a BDC, Ares must pay at least 90% of its taxable income as dividends to maintain a lower tax rate. That's why it pays such a high yield. Analysts expect its EPS to decline 5% to $1.91 this year, which doesn't quite cover its forward dividend rate of $1.92, but they expect its EPS to rise 1% to $1.93 in 2027 and cover that payout as interest rates rise again.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.