Dividends are a powerful wealth creation tool if you let them compound. For example, $10,000 invested in the S&P 500 in 1960 would have grown to over $982,000 by the end of 2024. However, that same investment would have grown to nearly $6.4 million by reinvesting dividends, according to Morningstar and Hartford Funds data.
When it comes to paying dividends, Ares Capital (ARCC 0.21%) stands out with a 10% yield (the S&P 500 currently yields around 1.1%). Here's a look at whether the high-yielding business development company (BDC) can make you rich through the power of compounding.
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Compounding wealth one dividend payment at a time
Ares Capital makes money by providing capital (primarily senior loans) to small, private companies. These loans generate interest income. As a BDC, Ares must distribute at least 90% of its taxable income to investors to comply with IRS regulations, which is why it has a high dividend yield.
The lender has an exceptional record of paying dividends. It has paid dividends since its IPO in 2004 and delivered a stable to growing dividend for more than 16 consecutive years.
NASDAQ: ARCC
Key Data Points
The dividend income has really added up over the years. Ares has generated an average annual total return of 12% since its IPO. It has grown a $10,000 investment made at its IPO into nearly $117,000. For comparison, a $10,000 investment in the S&P 500 at that same time would be worth around $95,000 today (assuming dividend reinvestment).
Can Ares Capital continue to enrich investors?
In stating the obvious, past performance is no guarantee of future returns. However, Ares Capital remains in an excellent position to continue enriching investors.
The BDC generated $2.02 in core earnings per share last year, more than covering the $1.92 per share it paid in dividends. That continued Ares long track record of generating earnings in excess of its dividend payments. The company is currently carrying forward $1.38 per share of excess earnings into 2026, giving it additional cushion to cover the dividend if it experiences an unexpected earnings decline.
Meanwhile, Ares is in a strong position to continue growing its loan portfolio. The company strengthened its balance sheet last year, adding a record $4.5 billion in new gross debt commitments, providing it with ample liquidity to support new investments. Ares' strong financial profile enabled it to grow its industry-leading portfolio from $26.7 billion (across 550 portfolio companies) to $29.5 billion last year (across 603 holdings). Despite its large scale and continued growth, Ares remains laser-focused on quality over quantity. Its annualized net realized loss rate is less than 0% across $72 billion of realized investments. That's a better rate than banks (-0.6%) and its BDC peers (-1.1%).
A potentially enriching dividend stock
Ares Capital has delivered a 12% annualized total return since its IPO, outpacing the S&P 500. Most of that return has come from reinvesting the dividend to compound shareholder value. Ares remains in a solid position to continue paying its high-yielding dividend, setting it up to enrich investors who reinvest that payout in the future.
