Ares Capital's (ARCC +0.48%) massive 9.2% dividend yield is likely to be the big draw for most investors. That's not a bad thing, per se, given that business development companies (BDCs) like Ares Capital are designed to pass income on to shareholders in a tax-advantaged manner. However, examining the company's dividend history will highlight the risk you face if you buy this stock just for the income it generates.
What does Ares Capital do?
As a BDC, Ares Capital is designed to help smaller companies develop and grow. It does this in two ways. First, the company lends money to small businesses. Second, Ares Capital provides management support by acting as an advisor to the companies to which it lends. Ares Capital is one of the largest and most respected players in the industry.
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That said, there are several important considerations to keep in mind as you evaluate an investment in a BDC like Ares Capital. For example, the companies to which a BDC makes a loan are small. That inherently increases the risk of loaning them money. Furthermore, the interest rates being charged are generally fairly high, with Ares Capital's average loan rate sitting at 10.6% in the third quarter of 2025. If it were cheaper to issue debt in the public market, sell stock, or even take out a bank loan, a company would do so.
Small companies paying high interest rates isn't usually a problem during good economic times. It is a problem during a recession. While there will always be some troubled investments in a BDC's loan portfolio, the number typically rises materially during a recession. Ares Capital's ability to support its dividend becomes increasingly stressed as more companies cease making interest payments.
The dividend history is telling
Right now, it is still a generally good time for the economy, so Ares Capital's dividend is probably safe for the moment. In fact, at the end of the third quarter of 2025, only 1.8% of its loans are on nonaccrual status, which means they aren't being paid. However, the chart above highlights the inherent volatility of the company's dividend. Note the two recessions, which are marked in gray, where the dividend was trimmed. Not surprisingly, the stock has tended to follow the dividend as it has increased and decreased.
This is probably the most important thing for dividend investors to keep in mind. If you are looking for a stock that is capable of providing you with reliable dividends, Ares Capital isn't likely to be the right stock for you. The business model is too exposed to the impact of economic downturns. It is also worth noting that the 2020 recession was unusual in that government policy during the coronavirus pandemic was the key driver of the downturn. The last natural recession the economy experienced occurred between 2007 and 2009.
NASDAQ: ARCC
Key Data Points
With the rampant inflation following the pandemic and rising consumer concerns about affordability, economic worries are heightened today. It wouldn't be at all surprising to see the U.S. economy experience a period of negative economic growth. If it doesn't happen soon, it will still eventually happen. That's just how economies work.
It is highly likely that Ares Capital will survive the next recession and continue to pay dividends. However, it is also likely that the dividend will be reduced. If you can't afford that income hit because you are using your dividends to pay living expenses, you should probably look elsewhere for a dividend stock.
How investors should think about Ares Capital
Ares Capital is not a bad company; it just isn't the kind of dividend stock that a conservative investor should own. It is actually somewhat similar to a private equity investment, as the loans it makes are primarily to nonpublic companies. If you are an aggressive investor and don't have sufficient funds to participate in private equity investing, Ares Capital may be an attractive option for you.
Ares Capital's loan-focused model may even interest more conservative investors who are interested in the private equity space, as loans are higher on the priority scale when a company goes bankrupt. The income it generates for investors, meanwhile, is a tangible return on your investment. However, you can't escape the risk inherent in the BDC business model, and it will eventually show up in the dividend.
