Ares Capital's 10% Yield May Not Be as Alluring as it Looks

The first thing that many dividend investors consider when looking for stocks is dividend yield. That makes logical sense, but it also creates the risk that an attractive yield will blind you to an investment's inherent risk. That's the problem with Ares Capital (NASDAQ: ARCC) and its ultra-high 10.6% dividend yield. Here's what you need to know before you buy this income stock.

Ares Capital is designed to pay dividends

Ares Capital is a business development company (BDC). It is a very specific business structure designed to pass income to shareholders in a tax-advantaged manner, much like a real estate investment trust (REIT). What BDCs do is make loans to smaller companies that don't have access to other financing options. BDCs are also supposed to provide guidance to borrowers to help them grow their businesses.

BDCs are very interesting. Because their clients can't easily access capital markets or get bank loans, BDCs can charge extremely high interest rates. Ares Capital's average loan rate in the fourth quarter of 2025 was a lofty 10.3%. That's how it supports its huge dividend yield. And from a big picture perspective, Ares Capital is a large and well-respected BDC.

Be careful what you wish for with Ares Capital

If you want to buy a business development company, Ares Capital should be on your short list. However, you need to make sure you fully understand the risks you are taking on before you buy any BDC, including Ares Capital.

By design, Ares Capital invests in high-risk, capital-constrained businesses. If they could get lower-cost loans or sell stock at attractive prices, they would almost certainly do so. In fact, Ares Capital is always dealing with at least a few clients that are having trouble covering their interest expenses. Roughly 1.8% of its loans were on non-accrual status at the end of 2025.

During recessions, however, non-accruals often spike. During the 2007 to 2009 Great Recession, Ares Capital's non-accruals rose from 1.2% to 4.4%. Given the high interest rates on the loans Ares Capital makes, that's not at all surprising and is, in fact, normal in the BDC sector.

The negative impact that recessions can have on dividends is also normal, as Ares Capital's dividend has been cut in each of the last two recessions. When too many clients have trouble paying at once, BDCs have little choice but to trim dividends. Even more generally, Ares Capital's dividend has been a bit volatile.

Ares Capital offers a high yield, but not a reliable dividend

When you step back, Ares Capital will likely continue to offer a large dividend and a high yield. But the dividend won't be reliable. If you need your dividends to pay for living expenses, Ares Capital's lofty yield probably won't be a good fit for your income portfolio.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.