Better Dividend Stock: Ares Capital vs. Verizon Communications

Income investors have many great dividend stocks from which to choose. Two stocks that are especially popular due to their high yields are Ares Capital (NASDAQ: ARCC) and Verizon Communications (NYSE: VZ).

Which of these two is the better dividend stock? Here's how Ares Capital and Verizon stack up against each other.

Image source: Getty Images.

The case for Ares Capital

Any argument for Ares Capital must start with the company's ultra-high dividend yield of 9.5%. Sometimes such lofty yields reflect a high level of risk. That isn't the case with Ares Capital, though. The business development company (BDC) has 16 consecutive years of stable or increasing quarterly dividends.

As long as Ares Capital remains profitable, investors can expect to receive dividends. BDCs must return at least 90% of their income to shareholders as dividends to be exempt from federal income taxes.

Ares Capital's prospects for continuing to generate solid profits appear favorable. The company estimates its total addressable market is roughly $5.4 trillion. Direct lending has become an increasingly popular alternative for borrowers due to the ease and speed of closing transactions. As the largest publicly traded BDC with extensive industry relationships, Ares Capital is understandably a first stop for many companies seeking private capital.

Size isn't the only way that Ares Capital stands above its rivals. Ares has delivered greater annualized total returns with lower volatility over the last three years, five years, and since its IPO in 2004.

Ares Capital doesn't only shine in comparison to other BDCs. Since its IPO, the company's total return has significantly outperformed that of the S&P 500 (SNPINDEX: ^GSPC).

Admittedly, Ares Capital's performance in 2025 hasn't been as impressive. However, CEO Kort Schnabel indicated in the BDC's third-quarter earnings call that things are looking up. Schnabel said that Ares Capital has seen "a noticeable acceleration in the volume of transactions under review, both sequentially and compared to the prior year, with more deals reviewed in September than any month this year."

The case for Verizon Communications

Verizon's forward dividend yield of 6.8% is a huge draw for income investors. It also helps that the telecommunications giant has increased its dividend for 19 consecutive years.

I suspect that streak will continue. Verizon's free cash flow rose to $15.8 billion in the first nine months of 2025 from $14.5 billion in the same period in 2024. When a company's free cash flow is increasing, its dividend payments are likely to follow suit.

Granted, Verizon's revenue and adjusted earnings aren't growing by leaps and bounds. The company operates in an industry with significant competition and associated subscriber churn. Its capital costs are also high.

However, Verizon's business is nonetheless growing. New CEO Dan Shulman also plans to "aggressively transform" the company's cost structure to "deliver sustainable returns" for shareholders.

Verizon's growth prospects could improve within the next few years. The company is already a leader in developing high-speed 6G technology, which could usher in new applications, including holographic communications and advanced extended reality. 6G networks are expected to be available by 2030.

In the meantime, Verizon's valuation is more attractive than its peers. The company's forward price-to-earnings ratio is 8.5, well below the forward earnings multiples of AT&T (NYSE: T) and T-Mobile US (NASDAQ: TMUS).

Better dividend stock?

I like both Ares Capital and Verizon Communications. However, I think Ares Capital is the better dividend stock at the moment.

Ares Capital's dividend yield is higher than Verizon's. Its growth prospects also appear to be more favorable. While Ares Capital's track record of dividend increases may not be as impressive as Verizon's, the BDC's dividend remains solid nonetheless.

The best news for income investors, though, is that they don't have to choose between these two high-yield dividend stocks. Buy both of them. That's what I've done.

Keith Speights has positions in Ares Capital and Verizon Communications. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.