Ares Capital: Is It a Smart Income Investment Right Now?

Ares Capital (NASDAQ: ARCC) stands as the largest business development company (BDC) globally. For long-term investors, it has proven to be a reliable income investment. A $10,000 investment at its IPO on October 5, 2004, would have grown to approximately $122,000 today, generating annual dividends nearing $10,700.

Currently, Ares offers a substantial forward yield of 8.8%, nearly double that of the 10-Year Treasury yield at 4.5%. Given this backdrop, is now the time to consider Ares as a stable dividend option amid a volatile economic landscape?

Understanding Ares Capital’s Business Model

Ares acts as a lender to “middle market” companies, those generating annual earnings of $10 million to $250 million, measured by earnings before interest, taxes, depreciation, and amortization (EBITDA). Its typical investment ranges from $30 million to $500 million in both debt and equity per company.

Many of these companies find it challenging to secure financing from traditional banks, which classify them as high-risk borrowers. Conversely, they are often too small to attract private equity firms. BDCs like Ares bridge this gap by providing loans with higher interest rates compared to conventional banking options.

This approach might appear risky, but Ares mitigates that by diversifying its investments across 566 companies, supported by 245 private equity sponsors within its $27.1 billion portfolio. Ares allocates 58.6% of its assets to first lien secured loans, 5.7% to second lien secured loans, and 5% to senior subordinated debt, positioning itself favorably in the event of bankruptcies among its clients.

Comparative Analysis: Ares Capital vs. Competitors

Ares’ primary competitor, Blue Owl Capital Corporation (NYSE: OBDC), managed a portfolio of 236 companies valued at $17.7 billion by the end of Q1 2025, with 81% of its assets in senior secured investments.

To assess Ares’ financial health, we should examine its debt-to-equity ratio (adjusted for available cash) and net assets per share. Over the previous four years, Ares maintained its debt-to-equity ratio while steadily increasing its net assets per share, despite macroeconomic pressures from inflation and rising interest rates.

Data source: Ares Capital. *Net of available cash.

Future Outlook for Ares Capital

Ares historically trades at a premium of $1 to $2 over its net assets per share. Currently, it is priced just below $22, consistent with that trend. However, analysts predict a 13% drop in earnings per share (EPS) for 2025, followed by a 1% decline in 2026, based on generally accepted accounting principles (GAAP).

This expected decline is largely due to falling interest rates, which impact its floating rate loans tied to the Federal Reserve’s benchmark rate. While higher interest rates previously enhanced spreads on new loans and net interest income, those benefits are expected to diminish as rates decline.

On an encouraging note, decreasing interest rates may alleviate the broader pressure on Ares’ portfolio companies and lower the company’s own floating rate interest costs. Therefore, Ares and similar BDCs require interest rates to stabilize in a favorable range for sustainable growth.

The Federal Reserve is anticipated to reduce rates two to three times this year; however, unpredictable tariffs and other macroeconomic pressures could threaten this outlook. Yet, Ares has successfully navigated two major recessions since its public listing and is likely to continue to thrive as demand for middle market loans persists.

Is Now the Right Time to Buy Ares Capital Stock?

Ares’ projected EPS of $2.02 for 2025 is sufficient to cover its forward annual dividend of $1.92 per share, and its valuation appears affordable at 11 times that estimate. Meanwhile, Blue Owl trades at an even lower multiple of 9 times forward earnings, with a projected EPS of $1.59 for 2025. However, its forward yield of 11.2% does not cover its annual dividend of $1.65.

Ares’ attractive valuation and high yield limit its downside potential, even in a declining interest rate environment and amidst ongoing trade conflicts. For those seeking a secure investment with dividend income, Ares presents a compelling option.

Should You Consider Investing $1,000 in Ares Capital?

Before purchasing stock in Ares Capital, it’s wise to weigh the following considerations:

Note that Ares Capital was not featured among the top stock recommendations made by investment analysts recently. While it remains a strong candidate for steady income, exploring other stocks may also yield significant returns.

Consider this: if you had invested in Netflix or Nvidia when they were recommended stocks, you would have seen exceptional growth in your investment. Ares could also have significant potential, depending on market conditions.

*Data refers to investment returns provided by analysts as of mid-2025.

Leo Sun has no position in any of the stocks mentioned. The views expressed reflect his analysis and do not necessarily represent Nasdaqs’s position.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.