Beyond Ares Capital Stock: This Is An Even Better Buy Today

Ares Capital (NASDAQ: ARCC), the world's largest business development corporation (BDC), attracts many income investors with its forward dividend yield of 9.9%. However, it's becoming harder to sustain that massive yield as interest rates decline.

As a BDC, Ares finances "middle market" companies, which often struggle to secure loans from conventional banks because they're classified as higher-risk clients. It currently invests in 603 companies across its $29.5 billion portfolio. To reduce its credit risk, it allocates 60.5% of its portfolio to first-lien secured loans and 5% to second-lien secured loans.

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Ares' business is well diversified, but its floating-rate loans track the Fed's benchmark rate. To generate consistent profits, those rates must stay in a "Goldilocks" zone. Higher interest rates boost Ares' net income, but they also create macro headwinds for its portfolio companies and make its dividend-paying shares less attractive than fixed-income investments.

After raising its benchmark rate 11 consecutive times in 2022 and 2023, the Fed reduced it 6 straight times in 2024 and 2025. That pressure reduced Ares' EPS from $2.68 in 2023 to $1.86 in 2025 -- which falls short of its forward dividend rate of $1.92 per share.

Ares' stock looks cheap at 10 times forward earnings, but other dividend-paying blue chip stocks look more attractive right now. One of those stocks is Realty Income (NYSE: O).

Why is Realty Income a better buy?

Realty Income, which owns more than 15,500 commercial properties in the U.S. and Europe, is one of the world's largest real estate investment trusts (REITs). REITs simply buy a lot of properties, rent them out, and split that income with their investors.

REITs and BDCs both need to pay out at least 90% of their taxable income as dividends to maintain a lower tax rate. But as interest rates decline, REITs generally grow faster than BDCs because it becomes cheaper to purchase new properties and easier to secure new tenants.

Realty's top tenants include 7-Eleven, Dollar General, and Walgreens. Some of its weaker tenants grappled with store closures in recent years, but its stronger tenants are offsetting that pressure by opening new stores.

That's why Realty Income has maintained an occupancy rate above 96% since its IPO in 1994. It's also one of the few REITs that pays monthly dividends rather than quarterly ones, and it has raised its payout 133 consecutive times since its public debut. It pays a forward yield of 5.1%.

Realty, like most other REITs, gauges its profitability by its adjusted funds from operations (FFO) per share rather than its EPS. It expects its AFFO per share to rise 1%-2% to $4.25-$4.27 in 2025, comfortably covering its forward dividend rate of $3.22 per share. It still looks like a bargain at 15 times its trailing AFFO per share, and it should remain a better income play than Ares this year.

Leo Sun has positions in Realty Income. The Motley Fool has positions in and recommends Ares Capital and Realty Income. The Motley Fool has a disclosure policy.