Sometimes the most exciting investment ideas don't come from YouTube videos or analyst reports, but from friends. In this case, it was Tim - he had Ares Capital on his radar and said: "Hey Stefan, take a look at this - pretty high dividend, kind of a financial company, but not a classic REIT." Sounds vague, so I took a closer look.
You can see what came out of it here: an in-depth analysis in the usual SteFinanz style - with everything that goes with it: business model, figures, opportunities, risks, valuation, interest rate environment, taxes, DCF, and of course: what do I do with it?
What is Ares Capital?
Ares Capital Corporation (ticker: ARCC) is not a bank, but also not a fund. It is a so-called Business Development Company (BDC) - in simple terms: a listed SME financier with a high dividend.
The business model: ARCC grants loans to medium-sized US companies, often in niches or growth sectors where traditional banks tend to stay away. The loans are mostly senior collateralized (first lien), often with variable interest rates and currently yield an average of 11-12% interest.
ARCC is managed by the well-known investment company Ares Management a big player in the private credit sector. Advantage: Deal flow, experience, structures. Disadvantage: Management fees.
What makes ARCC special: It is the largest listed BDC in the USA, with a portfolio of over 450 companies, well diversified and has remained robust through various crises. The company currently pays a dividend yield of just under 10 %with a relatively moderate level of debt and a historically low default rate.
Sounds good, doesn't it? But: the valuation is sporty, the interest rate environment is changing and the credit cycle is no walk in the park. Let's take a look inside.
Fundamental key figures (as at July 2025)
Key figureValue
Share price
19.44 € (approx. 22.5 $)
Dividend yield
approx. 9.5-10 % gross
Price-earnings ratio
~9-10
Price-to-book ratio
~1,1
Return on equity
~11-12 %
Debt (D/E)
~1.0x (conservative)
Default rate
~1.0 % (fair value)
NAV per share
~20 $ (~18 €)
The share price is slightly above book value, the dividend is generous but covered by current income. The default rate is extremely low for a loan portfolio of this size. ARCC leverages moderately and works with quality - no wild gambling.
How does ARCC earn its money?
Roughly speaking: ARCC raises capital, lends it on at high interest rates, collects interest, pays taxes (hardly any, because it has a REIT-like structure), pays out a lot - and that's it.
The focus here is on variable-interest loanswhich has been extremely profitable in recent years: interest rates in the USA have risen, as has interest income. At the same time, the risk has increased - the question is: how long can borrowers hold out?
Things are looking good so far. ARCC has managed the portfolio conservatively. Over 80 % of the loans are first lien. The average loan amount is less than 0.5 % of the total portfolio - in other words: broadly diversified, low cluster risks.
Valuation: Is the share too expensive?
In short: Fairly valuedperhaps slightly ambitious.
A conservative DCF model (based on expected dividends, 1 % growth, 10 % discount rate) arrives at a fair value of around fair value of around € 18-19 - exactly what the share currently costs.
Relatively speaking, ARCC is rather expensive in the BDC sector: While other BDCs trade at a discount to book value, ARCC is trading at 1.1x NAV. But: Quality costs.
As long as the dividend is secure and the NAV remains stable, the premium is justifiable. If interest rates fall sharply or defaults rise - then things get tight. But this applies to all BDCs.
Opportunities
- Stable dividend: Constant for years, not even cut in COVID. Almost a high-yield blue chip.
- Variable-interest loans: Continue to benefit from high US interest rates.
- Big name: ARCC is the top dog among BDCs - economies of scale, deal flow, management access.
- Good history: Averaged over 13% total annual return over the last 10 years.
- Low default rate: Portfolio is solid, hardly any major loan defaults to date.
- Insider buying: Management has been buying shares recently - not a bad sign.
Risks
- Interest rate turnaround: If the Fed cuts interest rates in 2026 or earlier, interest income will collapse - earnings will shrink.
- Economy: If the USA slides into recession, default rates will rise. Then the dividend may also have to fall.
- Management fees: ARCC is managed externally - Ares cashes in. Not necessarily bad, but in case of doubt it costs returns.
- Premium valuation: The share is not cheap. If confidence wanes, there is a risk of a return to book value or below.
- US taxes: 15% withholding tax on dividends - creditable, but net remains slightly less.
What do the analysts say?
In a nutshell: Everyone thinks it's okay.
Nobody is shouting "Buy!", but nobody is shouting "Sell!" either. The price targets are 22-23 $, which is pretty much at the current price. The dividend is the main argument for many.
ARCC is a typical "buy-and-hold income stock" - you don't buy it because of the price gains, but because of the dividend. If you know that, it's a good investment.
What do I do now?
I thought about it for a long time. The dividend is great. The history is strong. The valuation is not exaggerated.
But: We are late in the credit cycle. The risks are increasing. And with a 10% dividend, you can't afford to make many mistakes. I would not jump in blindly right awaybut: Put it on the watch list and wait for a setback.
If the share falls below €18 again, you could start buying. If you really want to get in, perhaps in small tranches. Or via a savings plan.
Me personally?
👉 Not yet a buy - but definitely worth watching. If interest rates stay high for longer and defaults remain under control, ARCC is a solid dividend earner.
SteFinanz traffic light on Ares Capital
CategoryValuationComment
Balance sheet quality
🟢 Good
Moderate debt, stable NAV development
Business model
🟢 Robust
Solid, proven BDC model, but dependent on interest rates
Dividend stability
🟢 Up to 🟡
High payout, but dependent on interest rates and the economy
Valuation
🟡 Fair
Slightly expensive vs. peers, but quality costs
Growth potential
🟡 Limited
Price fantasy limited - dividend is main argument
Risk
🟡 Medium
Credit risks, interest rate cycle, economy
Tax expense (DE)
🔵 Neutral
US withholding tax creditable, but slightly less net
Long-term potential
🟢 Stable
Good risk/reward ratio over 5+ years
Conclusion:
Ares Capital is not a high-flyer, but a solid dividend donkey. If you are looking for high current income and can withstand cyclical fluctuations, you can do little wrong here - as long as you don't ignore the risks.
Landed on Tim's radar, remained on my watchlist.
If you liked the analysis - please share it with others who are looking for dividend stocks. And if you have any questions or your own experience with BDCs: write to me!
Disclaimer: Not investment advice. Just sharing my personal opinion.
https://stefinanz.de/2025/07/10/ares-capital-das-dividenden-monster/