Ares Capital (ARCC +0.66%), the world's largest business development corporation (BDC), pays a forward dividend yield of 9.8%. That massive yield might initially seem like a red flag, but Ares has actually maintained or raised that payout for 16 consecutive years.
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How does Ares pay such a high yield?
As a BDC, Ares provides financing for "middle market" companies that struggle to secure loans from conventional banks because they're considered higher-risk clients. It's invested in 619 companies across its $29.3 billion portfolio. To reduce its risk, it allocates 59% of its portfolio to first-lien secured loans and 4% to second-lien secured loans.
NASDAQ: ARCC
Key Data Points
Ares floating-rate loans track the Fed's benchmark rate. To keep growing, it needs those rates to stay in a "Goldilocks" zone. Higher interest rates boost its net interest income, but they hurt its portfolio companies. Lower rates help those companies, but reduce Ares' own profits.
As a BDC, Ares must pay at least 90% of its taxable income as dividends to maintain a lower tax rate. That's why it pays such a high yield. Analysts expect its EPS to decline 5% to $1.91 this year, which doesn't quite cover its forward dividend rate of $1.92, but they expect its EPS to rise 1% to $1.93 in 2027 and cover that payout as interest rates rise again.
