Why I Just Bought More of This 9.4%-Yielding Dividend Stock

Key Points

• Ares Capital pays a juicy dividend and has a great dividend track record.

• The business development company's growth prospects are solid.

• Ares Capital also offers an attractive risk-reward proposition.

• 10 stocks we like better than Ares Capital ›

Warren Buffett has been a net seller of stocks for 11 consecutive quarters. That's one big difference between the famous investor and me. Another is that his net worth is roughly $150 billion more than mine.

One thing Buffett and I have in common, though, is that we're both highly selective about which stocks we buy. Like Buffett, I'm not pouring money into many stocks these days. However, I recently added to my position in Ares Capital (NASDAQ: ARCC). Here are three reasons why I bought more of this 9.4%-yielding dividend stock.

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1. The obvious reason

I just gave away the obvious reason why I bought more shares of Ares Capital: its juicy dividend yield. Income investors should love getting a 9.4% yield. While I'm not a full-blown income investor, I recognize that a strong yield makes it much easier for a stock to generate double-digit total returns.

But can Ares Capital continue to pay such great dividends? I think so. The company has paid stable or increasing dividends for 64 consecutive quarters. That 16-year track record gives me confidence in Ares Capital's ability to keep the dividends flowing.

It also helps that Ares Capital is a business development company (BDC). Like REITs, BDCs must return at least 90% of their income to shareholders as dividends to be exempt from federal income taxes. In Ares Capital's latest quarter, it reported earnings per share of $0.52 and paid out $0.48 per share in dividends.

2. Solid growth prospects

Don't be fooled by Ares Capital's dismal stock performance in 2025. For one thing, its total return is much higher thanks to the high dividend yield. The BDC's long-term track record also looks much better. Ares Capital's total return since its IPO in 2004 is significantly higher than the S&P 500's total return. Most importantly, though, the BDC has solid growth prospects.

Ares Capital's total addressable market is around $5.4 trillion. This market is growing thanks to increased borrowing demand and a long-term shift from banks to private capital (especially direct lending). As the largest publicly traded BDC, Ares Capital is uniquely positioned to take advantage of this big opportunity.

We're not talking about an opportunity in the distant future, either. Ares Capital CEO Kort Schnabel said in the company's Q2 earnings call that the number of transactions the BDC reviewed jumped 20% between Q1 and Q2, with activity in June accounting for nearly half of the Q2 activity. He added, "This momentum gives us visibility into a potentially more active second half of the year."

3. An attractive risk-reward proposition

Risk is a reality with any stock you buy. However, I believe that Ares Capital offers an attractive risk-reward proposition.

The stock market is priced at a historically high level. That's the biggest reason why Buffett isn't buying many stocks. But valuation isn't a concern with Ares Capital. The BDC's forward price-to-earnings ratio is only 10.7.

Ares Capital's balance sheet is strong. The company had around $6.5 billion of available liquidity and a debt-to-equity ratio net of available cash of 0.98 at the end of Q2. It has no debt maturing for the rest of 2025.

The BDC's portfolio is highly diversified with 566 portfolio companies. The largest investment is around 2%. Ares Capital also focuses on working with clients in resilient, noncyclical industries.

What about the potential impact of President Donald Trump's tariffs? Schnabel said in the Q2 earnings call, "I think our portfolio companies feel quite good about being able to pass through pricing." He added that only a "low single-digit percentage" of Ares Capital's portfolio has a high risk related to tariffs.

What do you get when you combine an ultra-high dividend yield, solid growth prospects, and an attractive risk-reward proposition? A stock that you can add to your holdings and feel good about.

Should you invest $1,000 in Ares Capital right now?

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Keith Speights has positions in Ares Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.