Ares Capital (NASDAQ: ARCC), the world’s largest business development corporation (BDC), pays a forward dividend yield of 10.1%. Some investors might see that massive yield and assume it’s a struggling company or a high-yield trap, but it’s actually one of the best income-generating 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 $10 million to $250 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) per year. These companies often struggle to secure loans from traditional banks because they’re classified as higher-risk clients, yet they’re also too small to attract most institutional investors.
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Ares usually 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 creditors in potential bankruptcies, it allocates 59.7% of its portfolio to first-lien secured loans, 4.8% to second-lien secured loans, and 5.8% to senior subordinated debt.
Why is Ares Capital worth buying right now?
Ares provides floating-rate loans pegged to the Fed’s benchmark rates. If those rates are high, it generates more net interest income, but its portfolio companies face greater challenges. If those rates are low, it generates less net interest income, but its portfolio companies face fewer headwinds. High interest rates also tend to drive income-seeking investors toward risk-free CDs and T-bills, while declining interest rates push them back toward higher-yielding stocks.
Ares and other BDCs need interest rates to stay in a “Goldilocks” zone — generally defined as moderate-to-high rates that are stable instead of rapidly rising or falling. That’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. In its latest earnings call, Ares said its spreads and fees on its new first-lien loans had widened in 2026. In other words, it’s writing new loans at higher yields even as the Fed treads water.
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BDCs are valued by their net asset value (NAV) per share rather than their earnings per share (EPS). Ares had a NAV of $19.59 per share at the end of the first quarter of 2026, but it was trading at just $18.90 per share as of this writing — which suggests it’s 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 rising 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 EPS to dip 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 previous years) to cover its future distributions at the end of the first quarter. Its stable debt-to-equity ratio of 1.1 also indicates it has plenty of room to take on more debt (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 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 would be paying out $325 in annual dividends. It achieved that steady growth even as the pandemic, inflation, volatile interest rates, geopolitical conflicts, and other macro headwinds rattled the 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 right now?
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Leo Sun 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.
The Best High-Yield Financial Stock to Buy With $1,000 Right Now was originally published by The Motley Fool
