Why I Trust ARCC's Nearly 10%-Yielding Dividend and Wouldn't Touch ACRE's Double-Digit Payout

I own shares of Ares Capital (NASDAQ:ARCC) for its lucrative dividend (9.9% current yield). I trust that payout, which is why I have been adding to my position over the past few months to boost my passive income. That trust led me to consider its sibling, Ares Commercial Real Estate Corporation (NYSE:ACRE), which currently yields an even more enticing 13.7%. However, after taking a closer look at ACRE's financial profile, I wouldn't touch it for dividend income.

Here's why I think one of these Ares Management (NYSE:ARES) affiliates is worth owning for dividend income, and the other is a potential yield trap.

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Ares Commercial Real Estate's shaky dividend

Ares Commercial Real Estate is a real estate investment trust (REIT) focused on commercial mortgage investments. It's the 11th-largest commercial mortgage REIT by market capitalization. It currently has a $1.9 billion investment portfolio comprised of loans held for investment and two owned real estate properties. Most of its portfolio (63%) is loans secured by multifamily and industrial properties. It also has some office loans and other higher-risk loans.

The mortgage REIT generated $0.12 per share of distributable earnings during the second quarter. That was below the $0.15 per share in dividends paid. On a more positive note, its distributable earnings doubled compared to the first quarter ($0.06 per share). However, its distributable earnings over the last 12 months were only $0.43 per share, well below the $0.60 per share it paid out in dividends. This makes the dividend look at risk for another reduction. ACRE already cut its dividend in early 2025 (from $0.25 per share) and in early 2024 (from $0.33 per share).

On a more positive note, the REIT has been making steady progress in repositioning its portfolio. It's addressing its higher-risk loans and reducing its exposure to the office sector and its owned properties. Meanwhile, it's investing in new loans. With support from Ares Management, the REIT closed $130 million in new loan commitments during the second quarter, bringing the total to more than $900 million over the last 12 months. As a result, a significant percentage of its portfolio consists of new-vintage loans, which should be of higher quality than its legacy portfolio. That drives the company's belief that it can "rebuild earnings to levels that are expected to meet or exceed the current dividend level," stated CFO Jeff Gonzales in the second-quarter earnings press release.

However, given the company's poor dividend track record and current high payout ratio, it's too risky for me.

Ares Capital's rock-solid dividend

Ares Capital is the largest publicly traded business development company (BDC). It has a leading $29.3 billion investment portfolio across 619 portfolio companies. Its largest investments are less than 1% of its portfolio. For comparison, two of ACRE's highest risk loans comprise 14.5% of its portfolio. While defaults have plagued its REIT sibling, ARCC has delivered an average annual net realized gain of 1% across its portfolio since its inception more than two decades ago.

The company's high-quality investment portfolio has supported its strong dividend record. The BDC has delivered more than 17 years of stable or increasing regular dividends. That's impressive considering that many of its BDC peers have had to cut their dividends at least once during that period.

Ares Capital pays $0.48 per share in dividends each quarter. That's currently below its core earnings, which totaled $0.47 per share in both the first and second quarters. However, its core earnings have exceeded its dividend over the last 12 months. Further, it has generated an additional $0.15 per share of net realized gains during the last year, further supporting its dividend. The BDC is currently carrying forward $1.38 per share of excess taxable income from last year for distribution to shareholders in 2026, further supporting its dividend.

The BDC's excellent dividend track record and current excess coverage give me confidence that it can continue to deliver a stable-to-growing dividend.

Same manager, very different results

Ares Management is a global leader in private credit. However, its publicly traded subsidiaries have different dividend records. ARCC's larger scale and diversification have enabled it to pay a stable-to-growing dividend for more than 17 straight years, while ACRE's much smaller size and lack of diversification (particularly its high exposure to the troubled office sector) have led it to cut its dividend a few times. This shows the importance of looking at the quality of a company's portfolio, and not its manager or yield, before buying shares for income.

Matt DiLallo has positions in Ares Capital. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.