Ares Capital (NASDAQ: ARCC), the world’s largest business development company (BDC), has been a dependable income investment for long-term investors. If you had invested $10,000 in its IPO on Oct. 5, 2004 and continuously reinvested your dividends, your investment would be worth $122,000 today and paying out nearly $10,700 in annual dividends.
Ares still pays a hefty forward yield of 8.8%, which is nearly double the 10-Year Treasury’s 4.5% yield. So should you buy it as a stable dividend play in this unstable macro environment?
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How do we analyze Ares Capital’s business?
As a BDC, Ares provides financing to “middle market” companies which generate about $10 million to $250 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) annually. It aims to invest $30 million to $500 million in debt and equity per company.
These companies often struggle to secure financing from traditional banks, which consider them higher-risk clients, but they’re also usually too small to attract investments from private equity firms. BDCs fill that gap by providing higher-interest-rate loans than traditional banks.
That strategy might seem risky, but Ares spreads its investments across 566 companies backed by 245 different private equity sponsors in its $27.1 billion portfolio. It allocates 58.6% of that portfolio to first lien secured loans, 5.7% to second lien secured loans, and 5% to senior subordinated debt — which all put it ahead of a lot of other creditors if its clients go bankrupt.
Ares’ closest competitor, Blue Owl Capital Corporation (NYSE: OBDC), had a portfolio of 236 companies with a fair value of $17.7 billion at the end of the first quarter of 2025. It locked up 81% of its portfolio in senior secured investments.
To gauge Ares’ health, we should review its debt-to-equity ratio (net of available cash) and its net assets per share. Over the past four years, it kept the former under control as it steadily grew the latter — even as inflation, rising rates, and other macro headwinds rattled the markets.
Metric | 2021 | 2022 | 2023 | 2024 | Q1 2025 |
|---|---|---|---|---|---|
Debt-to-equity ratio* | 1.21 | 1.26 | 1.02 | 0.99 | 0.98 |
Net assets per share | $18.96 | $18.40 | $19.24 | $19.89 | $19.82 |
Data source: Ares Capital. *Net of available cash.
What’s next for Ares Capital?
Ares has historically traded at a $1 to $2 premium to its net assets per share. As of this writing, it trades within that range at just under $22. However, analysts expect its earnings per share (EPS) to drop 13% in 2025 and dip 1% in 2026 on a generally accepted accounting principles (GAAP) basis.
That decline can be largely attributed to declining interest rates, since its floating rate loans are pinned to the Federal Reserve’s benchmark rate. Higher interest rates boosted its spreads on its new loans and net interest income, but those tailwinds dissipated as interest rates declined.
On the bright side, declining interest rates will reduce the macro pressure on its portfolio companies and reduce its own floating rate interest expenses. Therefore, Ares and other BDCs need interest rates to stay in a “Goldilocks zone” to grow at a sustainable rate.
The Federal Reserve is expected to cut its rates two to three times this year, but the Trump administration’s unpredictable tariffs, unresolved trade wars, and other macro headwinds could disrupt those plans. However, Ares has already weathered two major recessions since its public debut, and it should continue growing as long as there’s a demand for middle market loans.
Is it the right time to buy Ares Capital’s stock?
Ares’ projected EPS of $2.02 for 2025 will still comfortably cover its forward annual dividend of $1.92 per share. It also looks cheap at 11 times that estimate.
Blue Owl trades at an even lower 9 times forward earnings, but its projected EPS of $1.59 for 2025 — which translates to a forward yield of 11.2% — can’t quite cover its forward annual dividend of $1.65.
Ares’ low valuation and high yield limit its downside potential, even if interest rates continue to fall and the trade wars ripple through the economy. So if you’re looking for a safe place to park your cash and earn some extra income, Ares checks a lot of the right boxes.
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Leo Sun 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.
