Private Credit Keeps Making Headlines. Is Ares Capital's Big Dividend Still Safe?

The main reason most investors own Ares Capital (NASDAQ: ARCC) is its massive 10% dividend yield. For reference, the S&P 500 index (SNPINDEX: ^GSPC) has a yield of just 1.1%. Before you buy this business development company (BDC), however, you need to step back and make sure you understand just how risky the dividend is.

The ugly truth about Ares Capital's dividend

If you are looking for a stock with a stable or even slowly growing dividend, you will be highly disappointed with Ares Capital. The dividend history here is very clear: Ares Capital's dividend rises and falls over time. There is zero reason to expect that to change in the future, with the stock generally following the dividend higher and lower. It all relates back to the company's core business model.

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As a business development company, Ares Capital makes loans to smaller businesses that lack access to cheaper capital. In the first quarter of 2026, the average interest rate on its loans was a massive 10.3%. That's how it supports such a huge dividend, but there are negatives to consider here.

For example, interest rate changes will impact the rates it can charge. In fact, many of its loans carry variable rates, so they will adjust higher and lower fairly quickly. That increases dividend risk in a falling-rate environment. Ares Capital benefits when rates rise, but there's a risk here, too. Smaller companies may have difficulty covering rising interest costs. And if there is a recession, well, financial stress could easily lead to payment troubles among Ares Capital's customers. In fact, the dividend was trimmed during each of the last two economic downturns.

There is a canary in this coal mine

Ares Capital is basically a public business that invests in private credit. It is designed to pass income on to shareholders, so the dividend will likely be sizable all of the time. However, it will be variable, rising and falling along with the business environment. If you need the income from your portfolio to cover living expenses, it probably won't be a good fit. But if you can accept some dividend volatility, it is a well-respected BDC.

Understanding this nuance is very important right now. The business news is filled with stories about private credit funds limiting withdrawals, including Blackstone (NYSE: BX), which is doing so for its flagship fund. That's not an indication the sky is falling, noting that Ares Capital's non-accrual loans stood at a reasonable 2.1% of its portfolio at the end of the first quarter. There's really no reason to believe the dividend is at risk right now.

However, the uptick in withdrawal requests from private credit funds indicates that investors are worried about smaller, often higher-risk businesses with high-interest rate loans. Investors usually try to get ahead of potential losses from defaults by withdrawing assets before the problem becomes widespread. Limiting withdrawals allows private credit funds to control the impact and limit the need to sell assets in a rush. While that's not a dynamic that impacts Ares Capital, since the only option for investors is to sell the stock, you shouldn't ignore the withdrawal limits being imposed by private credit funds. This could be a leading indicator of dividend risk at Ares Capital.

Ares Capital isn't a bad investment if you understand it

If there is a recession, which some on Wall Street fear could be in the cards, the types of companies that Ares lends to could find it harder to cover their interest costs. Trimming its dividend is how Ares Capital handles such situations. It will keep paying a dividend, but just at a lower rate for a while until business conditions improve. The negative headlines about private credit markets are a sign that dividend investors should prepare for a possible dividend cut, even if one doesn't happen this time around, because history shows that the dividend will eventually be cut.

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