What a Credit Downturn Would Do to Ares Capital's Big Dividend
Ares Capital has a 10% yield and a volatile dividend history, with recessions being particularly difficult.
Overview
The big draw for Ares Capital (NASDAQ: ARCC) is its huge 10% dividend yield. Given that the S&P 500 index's (SNPINDEX: ^GSPC) yield is a miserly 1%, you can see why dividend investors would find Ares Capital attractive. But investors need to understand what they are buying, or they could end up surprised by a dividend cut. Here's what a recession and credit downturn could do to Ares Capital's dividend.
Ares Capital is a business development company (BDC), a corporate structure similar to that of a REIT. Basically, BDCs avoid corporate-level taxation if they distribute at least 90% of taxable earnings to shareholders as dividends. So Ares Capital's lofty yield isn't shocking. And unless something goes dreadfully wrong at the company, it will likely always pay an attractive dividend.
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Originally published at www.fool.com.