This 10%-Yielding Dividend Stock's Earnings Are Falling. Is Its Big-Time Payout in Trouble?
Key Points
Ares Capital's core earnings declined in the first quarter, falling below its dividend level.
The company has a big cushion of excess income from prior quarters.
It's also starting to see improved lending conditions.
Ares Capital (NASDAQ: ARCC) currently offers investors a monster 10% dividend yield. The business development company (BDC) has an excellent record of paying dividends, having delivered stability and growth for 16 consecutive years.
While the company has a long history of delivering income stability, its declining earnings are raising concerns about its ability to maintain the current dividend level. Here's a look at those numbers and whether Ares Capital's high-yielding dividend is at risk of getting reduced.
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Down, but not in trouble
Ares Capital generated $0.47 per share of core earnings in the first quarter. That was just below its quarterly dividend level of $0.48 per share. Despite that, the BDC declared a $0.48 per share dividend for the second quarter.
The lender's core earnings are down from $0.50 per share, a level it delivered each quarter last year. Meanwhile, its core earnings are down further from 2024 levels, when they ranged from $0.55 to $0.61 per share. This earnings decline seems to suggest the dividend is at risk.
However, that's not the case. Ares Capital has built up a cushion of excess taxable income that it has been carrying forward. It entered this year with $1.38 per share from 2025 for distribution in 2026.
Additionally, the company's core earnings don't include any net realized gains on investments. The BDC generated $0.55 per share of net investment income in the quarter, and $0.15 per share of net realized gains.
A strong start with positive momentum
Overall, Ares Capital was happy with its first-quarter performance. CEO Kort Schnabel stated, "We are off to a strong start to 2026 with solid core earnings, continued healthy portfolio performance and borrower fundamentals, and low levels of non-accruing investments." Meanwhile, even though the first quarter was a more volatile period due to the war with Iran, which weighed on transaction activity, the company is starting to see improvements in lending conditions. Schnabel noted that it's seeing enhanced spread and fees, lower leverage, and more attractive terms.
With the company's scale and strong financial profile, it's in a strong position to capitalize on new investment opportunities and generate attractive returns for shareholders. It currently has $6 billion of liquidity after raising over $1.25 billion of new debt financing at attractive terms. The company has a $1.8 billion investment backlog to support continued portfolio growth.
The dividend still looks safe
"Underpinned by our significant level of taxable spillover income and our consistently strong performance, our stable quarterly dividend reflects our view of the earnings power of our company in the current market environment," stated CFO Scott Lem in the first-quarter earnings press release. While the BDC has a higher risk profile than other high-yielding dividend stocks, its payout looks sustainable. That makes it a potentially compelling opportunity for more risk-tolerant investors seeking a lucrative income stream.
Matt DiLallo has positions in Ares Capital. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.