Key Points

Ares Capital is a respected business development company.
BDCs are structured to distribute income to shareholders, so the high 10% yield does not signal problems.
10 stocks we like better than Ares Capital

The main draw for investors in Ares Capital (NASDAQ: ARCC) is typically the stock's sizable 10% yield. By comparison, the S&P 500 index currently provides about 1.1%. This large yield does not point to trouble, but investors need to understand the firm's operating approach fully.

Ares Capital Functions as a BDC

Ares Capital operates as a business development company (BDC), a specialized structure. Similar to a real estate investment trust (REIT), a BDC passes dividends to investors with tax advantages. High yields are typical among BDCs, and some rivals deliver even larger payouts.

Like other BDCs, Ares Capital extends loans to smaller firms that cannot easily access capital. This limited access lets Ares charge elevated interest rates. In the first quarter of 2026, the portfolio averaged 10.3% interest, which supports the high dividend yield.

Ares maintains a strong reputation as a large BDC, so its model raises no immediate concerns. During the first quarter, it produced $0.55 per share in investment income, comfortably covering the $0.48 per share dividend. However, loan values declined, leading to a $0.35 per share drop in net asset value. Loan values naturally fluctuate with interest rate shifts and borrower conditions. With over 600 holdings, the portfolio remains well diversified.

Investors should monitor non-accrual loans closely. These rose from 1.8% of the portfolio at the end of 2025 to 2.1% at the end of 2026. The increase is modest, yet the trend warrants attention. Such periods occur normally for BDCs with smaller borrowers.

Ares Capital Dividend Varies Over Time

The BDC model and yield require careful consideration. Ares Capital's dividend is currently covered well, but it has faced cuts during downturns or sector challenges. The firm has lowered payouts in response at times.

Ares Capital will probably reduce its dividend again eventually, as part of the standard model amid growing private credit concerns. The stock price has historically followed dividend changes, keeping the yield elevated.

Ultimately, Ares Capital aims to deliver a large but variable dividend. Investors unable to accept income swings should avoid the stock despite the attractive yield.

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Reuben Gregg Brewer holds no positions in the mentioned stocks. The Motley Fool owns shares of and recommends Ares Capital. The Motley Fool maintains a disclosure policy.

The views expressed are those of the author and may not reflect those of Nasdaq, Inc.