Is Ares Capital a Buy, Sell, or Hold in 2026? | The Motley Fool

Ares Capital ( ARCC 0.15%) offers investors a monster dividend yield of 9.6%. The business development company's (BDC) payout is several times higher than the S&P 500 's current 1.1% yield. Here's a look at what investors should do with the high-yielding BDC stock in the coming year. Image source: Getty Images. What does Ares Capital do? Ares Capital is a specialty finance company. It focuses on providing direct loans and other investments to private middle-market companies (those with between $10 million and $1 billion in annual revenue). This capital enables these companies to grow their businesses, supporting their ability to make interest and dividend payments on Ares' investments. The company is part of the Ares Management group. Ares is a global leader in private markets with nearly $600 billion in assets under management ( AUM ) across credit, real estate, private equity, secondaries, and other businesses. Ares Capital's relationship to its parent provides it with greater access to high-quality investment opportunities compared to other BDCs. NASDAQ: ARCC Key Data Points Ares Capital is currently the largest BDC, with $28.7 billion in total investments across 587 portfolio companies as of the end of the third quarter. The bulk of its portfolio (71%) consists of senior secured loans, meaning it has priority over the borrower's assets in the event of bankruptcy . It focuses on lending to companies in less cyclical industries and currently has investments across portfolio companies in 34 different industries. As a result, Ares Capital has a very diverse and high-quality portfolio, which helps lower its risk profile. Since its inception, the company's cumulative net realized loss is less than 0%. Is the big-time dividend safe? As a regulated BDC, Ares Capital must distribute 90% of its taxable income to investors via dividends to remain in compliance with IRS regulations. That high payout ratio is a big reason why the company has such a high dividend yield. However, Ares Capital has done a much better job at paying a sustainable dividend than its peers in the BDC sector. The company has delivered 16 years of paying a stable to increasing quarterly dividend. It has been able to deliver dividend stability and growth by setting the quarterly payment to a sustainable level. It will periodically pay a small supplemental dividend, if needed, to return additional income to shareholders and remain in compliance with IRS regulations. The company currently pays a quarterly dividend of $0.48 per share, which is below its GAAP net income level ($0.57 per share in the third quarter) and core earnings per share ($0.50 per share). By setting its dividend payment to a sustainable level, Ares Capital has built up a cushion. The company is currently carrying forward about $1.26 per share of taxable income from last year for distribution in 2025. This strategy provides a cushion for the company to continue maintaining its current dividend level should it experience a temporary decline in income in the future. As a result, the dividend is on solid...

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