Ares Capital (ARCC 0.72%), the world's top business development corporation (BDC), is a reliable investment for income seekers. Its high forward dividend yield of 8.7% is nearly double the 10-Year Treasury's 4.4% yield, and its shares have risen 11% over the past year.
Investors might be wary of that high yield, but Ares' profits can easily cover its dividends. It could also be a great buy before its next earnings report on July 29 for five reasons.
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1. It has a resilient income-generating business model
BDCs offer financing to "middle market" companies, which often struggle to secure loans from traditional banks because they're considered higher-risk clients. These companies are also usually too small to attract investments from private equity firms or other investors.
In exchange for taking on more risk, BDCs charge higher interest fees than traditional banks. Like real estate investment trusts (REITs), they are also required to distribute at least 90% of their taxable income as dividends to maintain a lower tax rate. That makes them more reliable income-generating investments than traditional bank stocks.
2. It diversifies its portfolio to offset its risk
Ares mainly targets companies that generate about $10 million to $250 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) each year. It usually invests $30 million to $500 million in debt and equity per company.
To offset that risk, management spreads its investments across 566 companies backed by 245 different private equity sponsors across its $27.1 billion portfolio. To stay ahead of other creditors in potential bankruptcies, Ares allocates 58.6% of its portfolio to first-lien secured loans (meaning it's first in line for repayment), 5.7% to second-lien secured loans, and 5% to senior subordinated debt.
That diversification should insulate it from any severe economic downturns. That's why the stock generated a total return of 934% over the past 20 years, even as the global economy was rattled by the Great Recession, the COVID recession, and other financial crises.
3. It will benefit from stable interest rates
Ares offers floating-rate loans pinned to the Fed's rates, so it needs interest rates to stay in a "Goldilocks zone" to keep growing. Higher rates would boost its interest income, but they could also hurt the companies in its portfolio and make its dividend-paying shares less attractive than risk-free fixed income investments like CDs and T-bills. Lower rates would make it easier for its portfolio companies to grow and drive more income investors back to its stock, but they would reduce its interest income.
The Fed cut its benchmark three times last year, and many investors anticipate at least two more rate cuts this year. Analysts expect those cuts to reduce Ares' earnings per share (EPS) by 13% to $2.02 in 2025 and another 1% to $2 in 2026, but it can still comfortably cover its forward annual dividend of $1.92 per share.
Earnings might fluctuate with the near-term interest rates, but they should stabilize over the long term as those rates settle down into a more predictable range.
4. It looks reasonably valued relative to its net assets and earnings
From 2021 to 2024, Ares' year-end net asset value (NAV) per share grew from $18.96 to $19.89. In the first quarter of 2025, its NAV rose 1.5% year over year to $19.82 per share. That stable growth indicates its underlying portfolio is healthy.
At $23, it trades at only a slight premium to its NAV per share and just 11 times this year's projected EPS. Those reasonable valuations should limit its downside potential even if lower rates reduce its near-term earnings.
Ares' closest competitor, Blue Owl Capital (OBDC 0.44%), ended its latest quarter with a NAV of $15.14 per share. That's much closer to Blue Owl's current trading price of $15, and it trades at less than 10 times this year's earnings.
That might make it seem cheaper than Ares, but it also holds a smaller $17.7 billion portfolio across just 236 companies. Therefore, I believe investors are still willing to pay a slight premium for Ares' superior scale and diversification.
5. Its debt levels are decreasing
Last but not least, Ares' debt levels are declining. Its debt-to-equity ratio (net of available cash) dropped from 1.21 at the end of 2021 to 0.99 at the end of 2024. It dipped to 0.98 in the first quarter of 2025.
Those improvements were driven by the refinancing of its longer-term term debt at lower rates, its issuance of more unsecured corporate debt to cover its near-term maturities, the reduced use of its revolving credit facility, and its improved liquidity. That's also much lower than Blue Owl's debt-to-equity ratio of 1.26 in the first quarter of 2025.
That firm financial discipline indicates that Ares isn't recklessly taking on more debt to expand its portfolio. So if you're looking for a dependable, high-yielding income stock to hold for a long time, it would be a smart move to buy Ares ahead of its next earnings report.
