Ares Capital's Dividend Looks Tempting. Here's What Investors Need to Check Now

The main attraction for most investors in Ares Capital (NASDAQ: ARCC) will likely be the stock's high 10% yield. For comparison, the S&P 500 index (SNPINDEX: ^GSPC) is currently yielding around 1.1%. That huge yield isn't a sign of distress, but investors should go in with their eyes wide open about the company's business model.

Ares Capital is a BDC

Ares Capital is a business development company (BDC), which is a very specific corporate structure. Like a real estate investment trust (REIT), a BDC is designed to pass dividends on to investors in a tax advantaged manner. High yields are common for BDCs, and some of Ares Capital's competitors offer even higher yields.

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Like all BDCs, Ares Capital makes loans to smaller companies that lack access to capital. The lack of access to other forms of capital allows Ares to charge high interest rates on its loans. In the first quarter of 2026, the average interest rate for its portfolio was 10.3%. That helps explain how Ares can support such a high dividend yield.

Ares is a well-respected and large BDC, so there's no particular reason to worry about its business model. In the first quarter, it generated $0.55 per share of investment income, easily covering the $0.48 per share dividend it paid. That said, the portfolio of loans fell in value in the quarter, resulting in a $0.35 per share decline in Ares Capital's net asset value per share. It is entirely normal for loan values to rise and fall over time, driven by changes in interest rates and borrowers' fortunes. Ares has over 600 investments, so the portfolio is fairly diversified.

Still, investors will want to watch Ares Capital's non-accrual loans. Companies not paying their loans increased from 1.8% of the portfolio at year-end 2025 to 2.1% at year-end 2026. That's a fairly modest increase, but the direction is clearly the wrong way. It is also normal for a BDC to go through periods where portfolio companies are struggling, given their generally smaller businesses.

Ares Capital's big dividend is highly variable

The intersection of the BDC business model and Ares Capital's yield is important to keep in mind. Ares Capital's dividend is currently well supported, but it has gone through periods when it wasn't, as portfolio companies struggled through economic downturns and faced industry-specific headwinds. In response, Ares Capital has, at times, reduced its dividend.

ARCC data by YCharts

Ares Capital will likely cut its dividend again at some point. That's just a part of the business model, noting that Wall Street is increasingly worried about private credit market risk. The stock price will likely track along with the dividend, as it has historically, so the yield will remain elevated.

At the end of the day, Ares Capital is designed to pay you a large dividend, but it will be variable over time. If you can't handle that kind of income volatility, you probably shouldn't buy it even though the yield is highly enticing.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.