Ares Capital (ARCC 2.27%) is a business development company (BDC). It basically makes high-interest-rate loans to smaller businesses that don't have access to cheaper capital. That's good in some ways (note the stock's lofty 9.9% dividend yield). However, it also comes with some big risks.
Here are two things I think could happen in 2026 that would be troubling for dividend investors considering this stock.
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1. Ares Capital's average interest rate continues to fall
The Federal Reserve has been cutting interest rates, and there seems to be some support for further cuts in 2026. That's a problem for Ares Capital. In 2025, the interest rates on the loans this business development company had outstanding fell from 11.1% to 10.4%. As interest rates fall, it becomes harder for Ares Capital to support its generous dividend.
The rate Ares Capital charges is falling for two reasons. First, new loans come with lower rates. However, the vast majority of its loans have floating rates, so they rise and fall with the Federal Reserve's interest rate changes. If the bias is toward lower rates in 2026, the income Ares Capital generates will be under pressure.
2. Ares Capital's dividend could be cut
The risk of a dividend cut is elevated, as falling interest rates are already pressuring Ares Capital's dividend. I wouldn't be surprised by a dividend cut, given the belt-tightening taking place among consumers. That hints that the economy may not be as strong as it seems. It is entirely possible that the United States will fall into a recession in the near future. In each of the two recessions Ares Capital has lived through, it cut its dividend.
NASDAQ: ARCC
Key Data Points
That said, the dividend is inherently volatile. Falling rates alone could lead to a cut even if there isn't a recession. And so could the fact that nearly 25% of the loan portfolio is in software and services stocks. Investors are increasingly concerned that artificial intelligence (AI) is going to upend the software sector. Even if there is a cut, Ares Capital will still have a large dividend, and it will likely rise again in the future. However, if you need a reliable income stream, this high-yield stock may not be the best option for your portfolio.
Know what you own
Even if Ares Capital's dividend doesn't get cut in 2026, history suggests it will get cut at some point in the future. That's just the nature of business development companies. In the end, Ares Capital is a well-run BDC, but you need to enter 2026 understanding the impact of falling rates and be prepared for the possibility of a dividend cut if the United States falls into a recession.
