Ares Capital (NASDAQ:ARCC) operates as a business development company (BDC), primarily offering high-interest loans to small firms that struggle to secure affordable financing. While this approach has its merits—like the stock’s notably high dividend yield of 9.9%—it carries notable risks as well.
I think there are a couple of potential developments in 2026 that could raise concerns for dividend investors interested in this stock.
The Federal Reserve is currently reducing interest rates, and there’s a sense that more cuts might occur in 2026. This poses a problem for Ares Capital. By 2025, the loan interest rate had decreased from 11.1% to 10.4%. As interest rates drop, Ares Capital may find it increasingly challenging to maintain its generous dividend.
Two main factors are causing Ares Capital’s rates to decline. First, new loans are being issued at lower rates. Additionally, many existing loans have variable rates, meaning their interest can rise or fall depending on federal rate adjustments. If rates continue to fall in 2026, Ares Capital’s revenue might take a hit.
Already, decreasing interest rates are creating pressure on Ares Capital’s dividend, heightening the risk of a cut. With tensions rising among consumers, I wouldn’t be shocked if a dividend reduction were to occur. This could indicate that the economy isn’t as robust as it appears, and there’s a plausible chance that the U.S. could slip into a recession. Historically, Ares Capital has cut its dividend during previous downturns.
That said, dividends can be quite unpredictable. Even without a recession, falling interest rates alone might lead to a reduction. Plus, about 25% of its loan portfolio is tied to software and service stocks. Investors are becoming more wary about how artificial intelligence (AI) might disrupt the software sector. Even if a cut happens, Ares Capital still possesses a sizable dividend that could rebound later. However, if you’re relying on steady income, this high-yield stock might not fit your needs.
Even if Ares Capital’s dividend remained intact in 2026, past trends suggest it might eventually be cut. That’s pretty typical for business development companies. Overall, Ares Capital is a well-managed BDC, but it must be realistic about the effects of declining interest rates and get ready for the possibility of a dividend adjustment should the U.S. economy head into recession.
