Ares Capital's 10% Yield Just Survived a Tough Quarter. Is the BDC Still a Buy?

Ares Capital's (NASDAQ: ARCC) main draw is its monster dividend yield. At more than 10%, it's nearly 10 times higher than the S&P 500's yield.

The business development company (BDC) has paid a stable-to-growing dividend for 67 consecutive quarters. It has endured its share of tough times over the years, including over the past quarter. Here's a look back at its rough quarter and whether the high-yielding dividend stock is still a buy.

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A rough patch

Ares Capital's core earnings dipped in the first quarter to $0.47 per share, down from $0.50 per share in the fourth quarter and the first quarter of last year. That pushed them down below the BDC's quarterly dividend level of $0.48 per share. Despite that, Ares announced its next dividend, payable at the end of June.

While the company faced some headwinds in the period, management didn't seem too concerned. CEO Kort Schnabel led off the quarterly conference call by stating, "I believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our core earnings of $0.47 per share represent an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations." He also noted that, "heightened capital markets volatility, geopolitical uncertainty, and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter."

On a more positive note, the CEO stated that "Our overall portfolio quality remains healthy with continued low levels of nonaccruing loans and problem assets." One factor driving that view is that Ares stress-tested its software-focused portfolio companies to assess the risks of AI-related disruption. It hired a top consulting firm, which found that only a tiny fraction of its investment portfolio was at medium- to high-risk.

What this means for the dividend

The CEO also discussed the dividend on the call. He noted that while core earnings fell below the dividend, when you add the $0.15 per share of net realized gains it recorded in the period, earnings were well above the payout, "providing a strong underlying foundation for current distributions." Further, the BDC has been carrying forward excess taxable earnings. This $1.38 per-share spillover income from last year provides further support for the dividend. Additionally, Ares Capital has modest leverage and continues to deliver credit performance in line with its historical track record.

Meanwhile, even though market conditions were tougher in the first quarter, the company sees better days ahead. Lending spreads have widened while terms have improved. These factors continue to drive the CEO's view that the "current dividend approximates the long-run underlying earnings power of our business." As a result, Ares expects to continue building on its more than 16-year track record of paying a stable-to-growing dividend.

Still a buy

Shares of Ares Capital have slumped about 12% over the past year due to concerns about the private credit market, including the impact of AI on software companies and their ability to repay loans. As a result of that decline, Ares Capital stock currently trades at a discount to its net asset value ($19.59 per share compared to its recent share price of less than $19 per share). With the dividend safe, that discount makes the BDC look like a compelling investment opportunity right now for those seeking a big-time passive income stream.

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