Ares Capital Shares Slide, Pushing Yield Near 10%: What the Rising Non‑Accrual Ratio Signals for Investors

Key Points

• Ares Capital added four new non‑accrual loans during the second quarter.

• Its non‑accrual rate remains below its historical average.

• The BDC has a strong track record of generating realized gains that outpace losses.

Shares of Ares Capital (NASDAQ:ARCC) have fallen roughly 10% from their 52‑week high of $22.51, now trading around $20 per share. The decline has lifted the dividend yield to about 9.6%, close to 10%. Several headwinds—including higher interest rates, declining core earnings, and an uptick in non‑accruals—are driving the sell‑off. Among these, the rise in non‑accruals is of particular concern because the company’s high dividend depends on continued interest receipts.

Although the increase in non‑accruals is noteworthy, it has not yet become a critical red flag. Management notes that the four new defaults are isolated and unrelated, and the overall non‑accrual rate remains below historical benchmarks.

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Why a rise in non‑accruals is slightly worrisome

Ares Capital’s second‑quarter report shows that loans classified as non‑accrual now represent 2.4% of its total investments at amortized cost (or 1.4% at fair value). This marks an increase from 2.1% in the prior quarter after the addition of four new non‑accrual loans. A rising non‑accrual ratio can signal early stress in the credit portfolio, potentially threatening the dividend if the trend continues.

CEO Kort Schnabel commented on the quarterly call that “We are not able to discern any trends yet around certain industries that are experiencing any kind of outsized weakness or leading us down this path toward more credit normalization.” President Jim Miller added that while the current non‑accrual rate remains below the firm’s historical average of 3% since the global financial crisis, “we think there is a reversion toward the mean there,” suggesting the concerning trend could persist.

Why I’m not concerned enough to sell

Despite the uptick, Ares Capital’s size and diversification provide comfort. With a $29.3 billion portfolio across 619 companies, its top ten holdings represent only 10.5% of fair‑value assets—well under the 22.2% concentration seen at many peers. Over its 21‑year history, realized gains have outpaced losses by more than $1 billion, averaging roughly 1% annually. This track record has supported a 17‑year streak of stable‑to‑growing dividends.

Core earnings slipped to $0.94 per share in the first half of the year, down from $1.00 per share a year ago, placing them slightly below the $0.96 dividend. However, the company generated $0.15 per share of net realized gains in the past 12 months and carries $1.38 per share of taxable spillover income forward, providing additional cushion for the payout.

Here’s what would worry me enough to sell

If the non‑accrual ratio were to climb above its historical average, it could pressure core earnings and erode the cushion built from realized gains. Should the dividend ever appear at risk, I would consider selling ARCC and reallocating to a higher‑quality, high‑yielding dividend stock.

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