Ares Capital Remains a Solid Bet Despite Rising Rates

The Federal Reserve has raised interest rates for the first time since 2023 to combat persistently high inflation, which is currently above 3%. This move is expected to continue with further rate hikes. High-yield dividend stocks like Ares Capital (ARCC) are affected by rising interest rates, but despite this, its yield remains over 10%, making it an attractive option.

Ares Capital has $11.8 billion of its $15.9 billion in outstanding debt as floating-rate debt, which will be impacted directly by higher interest rates. However, the company recently raised $750 million in notes due in 2033 at a fixed 6.25% rate, providing it with additional capital.

While rising rates make lower-risk income investments more attractive, pushing up the yields of riskier investments like Ares Capital, the increased interest income generated from its floating-rate debt holdings will more than offset the increased interest expenses on its debt.