Ares Capital(NASDAQ:ARCC)The world’s largest business development corporation (BDC), pays a forward dividend yield of 10.1%. Some investors might look at that massive return 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 with $1,000 (or more) in this choppy market.
What does Ares Capital do?
As a BDC, Ares finances “middle market” companies, which generate between $10 million and $250 million in earnings before interest, taxes, depreciation and amortization (EBITDA) per year. These companies often have difficulty obtaining loans from traditional banks because they are classified as higher risk clients, but they are also too small to attract most institutional investors.
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Ares typically invests between $30 million and $500 million in debt and equity per company. In exchange for taking on more risks, it charges higher interest rates than traditional banks. It distributes its investments across 607 companies in its $29.5 billion portfolio. To get ahead of other creditors in potential bankruptcies, it allocates 59.7% of its portfolio to senior secured loans, 4.8% to second-tier secured loans and 5.8% to senior subordinated debt.
Why is Ares Capital worth buying right now?
Ares offers floating rate loans linked to the Federal Reserve’s reference rates. If those rates are high, you generate more net interest income, but your portfolio companies face greater challenges. If those rates are low, you generate less net interest income, but your portfolio companies face fewer headwinds. High interest rates also tend to push income-seeking investors toward risk-free CDs and Treasury bills, while falling interest rates push them toward higher-yielding stocks.
Ares and other BDCs require interest rates to remain in a “Goldilocks” zone, generally defined as moderate to high rates that are stable rather than rising or falling rapidly. That’s the current situation: After six consecutive rate cuts in 2024 and 2025, the Fed has left its benchmark rate unchanged at between 3.50% and 3.75% during its three FOMC meetings in 2026. In its latest earnings call, Ares said its spreads and fees on its new prime loans had widened in 2026. In other words, it is making new loans at higher yields. high even as the Federal Reserve moves forward. water.
BDCs are valued by their net asset value (NAV) per share rather than their earnings per share (EPS). Ares had a net asset value of $19.59 per share at the end of the first quarter of 2026, but was trading at just $18.90 per share at the time of writing, suggesting it is slightly undervalued.
BDCs must pay out at least 90% of their pre-tax income as dividends to maintain a lower tax rate. Ares has paid stable or increasing dividends for 67 consecutive quarters, and its projected core EPS of $1.93 for 2026 will cover its forward dividend rate of $1.92 per share.
Analysts expect Ares’ core earnings per share to fall slightly to $1.92 in 2027. That might seem like a tight payout ratio, but it still had nearly $988 million ($1.38 per share) in “spillover” taxable income (retained 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 take on more debt (or issue more equity) to expand its portfolio and boost its long-term earnings.
Why Ares is a great place to park $1,000
If you had invested $1,000 in Ares ten years ago, left it alone, and automatically reinvested its dividends, your investment would be worth $3,216 today and you would be paying $325 in annual dividends. It achieved that steady growth even as the pandemic, inflation, volatile interest rates, geopolitical conflicts and other macroeconomic headwinds rocked global markets. Ares is not an interesting growth stock, but it is still a reliable source of income for long-term investors.
Should you buy Ares Capital shares right now?
Before buying shares in Ares Capital, consider this:
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Ares Capital. The Motley Fool has a disclosure policy.
The Best High-Yield Financial Stocks to Buy with $1,000 Right Now was originally published by The Motley Fool
