Is Ares Capital Stock a Buy Now?

Key Points

• Ares Capital is offering a huge 8.5% dividend yield today.

• Ares Capital is a large and well respected business development company, or BDC.

• If you are looking for a reliable income stock you'll want to tread carefully with Ares Capital.

• 10 stocks we like better than Ares Capital ›

The single most important thing to understand about Ares Capital (NASDAQ: ARCC) is that it is a business development company (BDC). That's even more important than the huge 8.5% dividend yield it is offering today. Here's a look at the key facts here, before you add this high-yield stock to your dividend portfolio.

What does Ares Capital do?

As noted, Ares Capital is a business development company. That's a unique business model, with the company effectively acting as a lender to small businesses. There are some rules around BDCs that are important. For example, they are supposed to provide guidance to the companies to which they are lending. And there are limits on the amount of leverage a BDC can take on at the corporate level, which helps to limit risk.

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Ares Capital is a well-respected BDC. If you have your heart set on owning a business development company it's not a bad choice. But there are notable idiosyncratic risks you have to consider first.

One of the most important is the fact that BDCs are largely lending to companies that don't have other attractive funding options. The yields that BDCs charge on their loans tend to be rather high, often as much as 10% (more on this below). If a BDC's client could get better interest rates from a bank, or issue stock or sell debt on the open market at better terms, it would almost certainly do so.

Part of the issue is that BDCs often work with smaller businesses. A smaller business just doesn't have the same access to capital as a larger business. There is a very real risk that a small business may not survive. So the customer base for BDCs like Ares Capital is filled with business risk.

The high rates that BDCs charge is supposed to make up for that risk. But high rates can also exacerbate the problem. With such a high interest rate hurdle to jump, it is simply harder for a smaller business to turn a profit. Complicating that story is the fact that BDCs often issue debt with variable rates. So when rates rise the costs that BDC clients have to pay go up, too, making profitability that much harder to achieve.

Is Ares Capital worth buying?

Ares Capital has an inherently risky business. It isn't a bad company, but the BDC business isn't one that a conservative income investor will likely find appealing. Some numbers will help.

Ares Capital's weighted-average yield in the second quarter of 2025 was 10.9%. Nearly 70% of the debt it has issued comes with floating rates. To be fair, nearly 60% of the debt Ares Capital has issued is first lien, so it has priority over other debt. But that doesn't change the risk of dealing with small companies; it just puts Ares Capital in better position as a creditor if a client falls on hard times.

There is an insidious problem with the BDC model that even a well-respected company like Ares Capital can't avoid. When rates go up, the companies to which Ares Capital lends money have to deal with higher interest rates on their debt. As noted, that makes it more difficult for them financially. To put that another way, the risk of default rises and puts Ares Capital's dividend at risk. When rates fall, however, Ares Capital's income declines as the rates on the debt it has issued reset lower. That also puts the dividend at risk.

ARCC data by YCharts

The orange line on the chart above shows how volatile Ares Capital's dividend has been over time. To be fair, Ares is large and has a diversified client base with over 560 companies. It seems unlikely that it will go out of business. But as the dividend record shows, the BDC model, even when executed relatively well, isn't going to provide investors with a reliable dividend.

Ares Capital could let you down at the worst possible time

The key period on the graph above is 2007 to 2009, which was such a deep recession that it earned the nickname the Great Recession. During such an economic downturn, most dividend investors would probably want their dividend stocks to keep reliably paying their dividends. But Ares Capital was forced to deeply cut its dividend.

That's not a knock on Ares Capital as a business; it is an inherent risk of the BDC model. In fact, Ares Capital managed through that difficult period quite well, noting that some other BDCs didn't survive that recession. But if you can't handle the risk of a variable dividend, perhaps right when you least want to see dividend variability, you probably shouldn't buy Ares Capital now or ever.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.