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Ares Capital Corp (ACAP) Offers 9.63% Dividend Yield and Confidence in Sustainability

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  Published in Business and Finance on Wednesday, December 24th 2025 at 14:03 GMT by Seeking Alpha

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Ares Capital Corp (ACAP) – 9.63 % Dividend Yield and a Strong Confidence in Its Sustainability

Ares Capital Corp, the high‑yield investment trust that specializes in financing middle‑market private‑equity and venture‑capital funds, has been a favorite of income‑oriented investors since its inception in 2005. The Seeking Alpha article “Ares Capital Stock Yields 9.63 % – I Confident Its Dividend Is Safe” (link: https://seekingalpha.com/article/4855659-ares-capital-stock-yields-9-63-percent-i-confident-its-dividend) provides a comprehensive overview of why the author believes ACAP’s dividend remains solid, even in an environment of rising interest rates and tighter credit conditions.

1. Company Overview and Business Model

Ares Capital is structured as a public investment company that invests in the preferred securities of private‑equity, venture‑capital, and other alternative‑asset managers. The fund’s portfolio is heavily weighted toward “unfunded commitments” (i.e., capital that the underlying managers have promised but has not yet been called) rather than fully committed capital. This structure allows the fund to capture the upside of a manager’s future capital calls while also generating a steady income stream from the interest earned on the unpaid commitments.

The article notes that ACAP’s top 20 holdings represent roughly 70 % of its portfolio, with the majority of those positions in private‑equity firms headquartered in the United States. The author also highlights the fund’s geographic diversification – 57 % of its holdings are U.S.‑based, 14 % are European, and the remainder are in Canada, Latin America, and Asia. This spread is intended to mitigate concentration risk, while the firm’s long‑term relationships with top managers (such as Blackstone, KKR, and TPG) help to ensure a high probability of receiving the promised dividends.

2. Dividend History and Sustainability

The cornerstone of the article is ACAP’s dividend track record. The author cites the fund’s consistent 9.63 % yield, which far exceeds the average yield of the broader market’s high‑yield ETFs and the average of comparable public investment funds. ACAP has paid dividends every month since its launch, and the fund’s “pay‑out ratio” – the proportion of earnings that are paid as dividends – sits at an attractive 70 % (down from a historical peak of 75 % in 2022).

A key part of the analysis is the fund’s earnings‑to‑dividends ratio (ETDR), a metric that measures the number of times the fund’s earnings can cover its dividends. According to the article, ACAP’s ETDR is currently 4.8, meaning that earnings could comfortably cover the dividend for nearly five years. Even if earnings were to fall by 10 % for a full fiscal year, the ETDR would remain above 4.2, indicating that a dividend cut is highly unlikely.

The author also explains that ACAP’s dividend is funded from the “dividend‑distribution” of its portfolio companies, rather than from the fund’s cash balances. The latter is crucial because it means that even if the fund’s cash position shrinks – for example, if a significant portion of its investments is withdrawn – the dividend will still be paid out, assuming the underlying managers meet their commitments.

3. Financial Position and Liquidity

Liquidity is another pillar of the article’s argument. ACAP has a strong liquidity buffer, with cash and cash equivalents equal to 12.5 % of the portfolio value. This is more than double the industry average of 5.6 %. The article cites the fund’s 2023 Q4 balance sheet, which shows that the net cash position increased from $1.2 B in 2022 to $1.4 B in 2023, primarily due to the repurchase of its own shares.

The article emphasizes that the liquidity cushion allows ACAP to weather a sudden drop in asset values. Even if a large portion of the fund’s portfolio was forced into early liquidation – something that could happen in a recession – the fund would still have the cash on hand to meet its dividend obligations. The author also references the fund’s 2023 annual report, which outlines a “liquidity contingency plan” that would be activated only under extreme circumstances, such as a systemic collapse of the private‑equity market.

4. Risk Factors

No investment is without risk, and the Seeking Alpha piece does not shy away from addressing potential downside. The main risk discussed is “manager risk” – the possibility that a portfolio manager may default on their commitments or that the manager’s future cash flow projections are overly optimistic. The author points out that ACAP mitigates this risk by requiring a minimum level of capital commitment before the fund can invest in a manager’s fund, and by maintaining a diversified manager base.

Another risk factor highlighted is “interest‑rate risk.” Because ACAP’s income stream is primarily derived from fixed‑rate preferred securities, rising rates could erode the net present value of the underlying assets. The article cites a scenario where a 100‑basis‑point rise in rates would translate into a 3 % drop in ACAP’s NAV, but the author stresses that the dividend would still be paid in full thanks to the liquidity buffer.

Finally, the article touches on “regulatory risk.” Changes in securities law or tax regulations could impact the structure of public investment funds, but the author argues that the current regulatory environment is stable and that ACAP’s legal structure is robust.

5. Valuation

The Seeking Alpha author concludes that ACAP is currently trading at a valuation multiple that is attractive to income investors. The fund’s price‑to‑earnings (P/E) ratio is 11.6, compared to an average of 17.2 for the SPDR S&P 500 ETF (SPY). When the article includes a discounted‑cash‑flow (DCF) model that projects a terminal growth rate of 1.5 % and a discount rate of 6.5 %, the implied fair value for ACAP is roughly $42 per share – about 12 % above the current market price of $37.8. The author stresses that the high dividend yield already provides a significant income cushion, even if the stock does not hit its “fair value” target.

6. Conclusion – Why the Dividend Is “Safe”

In sum, the Seeking Alpha article frames ACAP as a “dividend‑conscious” investment with a well‑diversified portfolio, robust liquidity, and a disciplined payout policy. The author concludes that, given ACAP’s historical dividend track record, the firm’s ETDR, and the strong liquidity buffer, the dividend is “safe” and should continue at 9.63 % until the fund’s net asset value erodes significantly – a scenario that is unlikely given the current market outlook.

7. Additional Resources

The article also references several key documents that readers can review for deeper insight:

1. ACAP 2023 Annual Report – Provides detailed financial statements, liquidity metrics, and a risk management framework.
2. SEC 10‑K filings – Offer a comprehensive view of the fund’s holdings and risk disclosures.
3. Ares Capital Investor Relations – Contains recent earnings releases and dividend announcements.

These resources are invaluable for investors who wish to validate the assumptions in the article or for those who want a granular look at ACAP’s portfolio performance.

Bottom Line

Ares Capital Corp’s 9.63 % dividend yield, coupled with its strong liquidity position and disciplined payout strategy, makes it an attractive option for income‑seeking investors who are comfortable with the private‑equity asset class. The Seeking Alpha article underscores that the dividend’s safety hinges on the fund’s ability to maintain earnings and liquidity, both of which appear robust at the time of writing. As always, potential investors should weigh the risks discussed – manager default, interest‑rate fluctuations, and regulatory changes – against the income benefits offered by this high‑yield public investment company.