Could Buying Ares Capital Stock Today Set You Up for Life?

If you are looking to set yourself up with a lifetime of reliable income, you'll want to tread carefully with Ares Capital (NASDAQ: ARCC). The dividend yield is a huge 9.4%, but the business behind that yield comes with some very important risks to consider. Here's what you need to understand before you buy Ares Capital.

What does Ares Capital do?

Ares Capital is what is known as a business development company (BDC). This is a very specific corporate structure that is intended to pass income on to shareholders in a tax-efficient manner. It's similar to, but slightly different from, real estate investment trusts (REITs). Where REITs invest in rental properties, BDCs make loans to smaller businesses. Both distribute a significant portion of the cash flows they generate as dividends.

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The loans that Ares Capital makes generally carry high interest rates. In the third quarter of 2025, the average yield on the loans Ares Capital made was a huge 10.6%. A company that could get access to cheaper capital than that would almost certainty do so. The truth is that Ares Capital's clients are taking these high interest rate loans because it would be less desirable to take a loan from a bank or tap the capital markets by selling equity or issuing bonds in the open market.

That doesn't mean the companies that Ares Capital makes loans to are bad businesses. Part of the risk here comes from the fact that the companies are smaller. Still, there is more risk. Even when the economy is strong, Ares Capital will have to deal with troubled loans. It is just a part of the BDC business model. However, the big issue that investors need to think about is what happens during recessions.

When businesses go south all at once

In the third quarter of 2025, Ares Capital was working with 587 companies. If a handful of those companies are struggling, it's unfortunate, but it won't likely derail the BDC's ability to pay dividends. When there's a recession, however, a lot of businesses are likely to be struggling at the same time. And supporting a loan with a 10.6% interest rate could suddenly become extra challenging. If too many of Ares Capital's clients struggle at the same time, the BDC will have a hard time supporting its dividend.

Looking at Ares Capital's dividend history shows very clearly that volatility is the norm, not the exception. And the worst periods are, as you would expect, during broad economic downturns. That's not a knock on Ares Capital as a business. It is a well-respected business development company.

ARCC Dividend data by YCharts

In fact, during the Great Recession, it acted as an industry consolidator, buying weaker competitors. Today, it is one of the largest BDCs based on market capitalization. It also has the backing of Ares Management (NYSE: ARES), which handles the day-to-day operations of the BDC. It is, without a doubt, positioned well for long-term success.

And still, investors looking for a reliable and consistent dividend shouldn't buy into the huge 9.4% yield thinking they've created an annuity-like income stream. The dividend is highly likely to rise and fall over time because of the underlying risks of operating as a BDC.

Don't cross Ares Capital off the list

While you can't buy Ares Capital with the belief that you've set yourself up for a lifetime of reliable income, that doesn't mean you should toss it off your list. The BDC structure is designed to pay dividends and Ares Capital is a well-run BDC. It could be a strong complement to other dividend stocks with more reliable dividend histories, like Dividend Kings, which have 50-plus years of dividend increases.

Just make sure that you don't put yourself in a position where you need the dividends Ares Capital pays to live.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.