Ares Capital(NASDAQ: ARCC )The world’s largest business development corporation (BDC), pays a forward dividend yield of 10.1%. Some investors may look at this massive yield and assume it’s a struggling company or a high-yield trap, but it’s actually one of the best income-producing financial stocks you can buy for $1,000 (or more) in this choppy market.
What does Ares Capital do?
As a BDC, Ares finances “middle market” companies, which earn $10 million to $250 million annually before interest, taxes, depreciation, and amortization (EBITDA). These companies often struggle to get loans from traditional banks because they are classified as high-risk clients, yet they are too small to attract most institutional investors.
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Aris typically invests $30 million to $500 million in debt and equity per company. In exchange for taking on more risk, it charges higher interest rates than traditional banks. It spreads its investments across 607 companies in its $29.5 billion portfolio. To stay ahead of other lenders in potential bankruptcy, it allocates 59.7% of its portfolio to first-lien secured debt, 4.8% to second-lien secured debt, and 5.8% to senior subordinated debt.
Why is Ares Capital worth buying now?
Ares provides floating rate loans based on the Fed’s benchmark rate. If those rates are higher, it generates more net interest income, but its portfolio companies face more challenges. If those rates are low, it generates less net interest income, but its portfolio companies face less hardship. High interest rates also drive income-seeking investors to risk-free CDs and T-bills, while falling interest rates push them to higher-yielding stocks.
Ares and other BDCs require interest rates to stay in the “Goldilocks” zone — generally defined as moderate to high rates that are stable rather than rising or falling rapidly. Here’s the current situation: After six consecutive rate cuts in 2024 and 2025, the Fed has left its benchmark rate unchanged at 3.50% to 3.75% through its three FOMC meetings in 2026. Income CallAres said its spreads and fees on its new first-lien loans have increased in 2026. In other words, it’s writing new debt at higher yields even as the Fed treads water.
BDCs are valued by their net asset value (NAV) per share rather than their earnings per share (EPS). Ares’ NAV at the end of the first quarter of 2026 was $19.59 per share, but as of this writing it was trading at just $18.90 per share – suggesting it is slightly undervalued.
BDCs must pay out at least 90% of their pre-tax income as dividends to maintain a low tax rate. Iris has paid stable or increasing dividends for 67 consecutive quarters, and its projected core EPS for 2026 of $1.93 per share will cover a forward dividend rate of $1.92.
Analysts expect Ares’ core EPS to decline slightly to $1.92 in 2027. That sounds like a tight payout ratio, but it still had about $988 million ($1.38 per share) of “spillover” taxable income (held over from prior years) to cover its future distributions at the end of the first quarter. Its stable debt-to-equity ratio of 1.1 also indicates that it has plenty of room to borrow more (or issue more shares) to expand its portfolio and boost its long-term earnings.
Why Ares is a Great Place to Park $1,000
If you invested $1,000 in Ares ten years ago, left it alone, and automatically reinvested its profits, your investment would be worth $3,216 today and paying $325 in annual dividends. It achieved that steady growth even as pandemics, inflation, interest rate fluctuations, geopolitical conflicts, and other macro headwinds rocked global markets. Ares isn’t an exciting growth stock, but it’s still a reliable income play for long-term investors.
Should you buy stock in Ares Capital now?
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Liu Sun No positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has one Disclosure Policy.
