Ares & Realty: A Fool’s Errand (and Some Smart Money)

Alright, settle in, folks. We’re talking money. Serious business. Or, as serious as business gets when a historian like myself is forced to explain it to… well, you. Now, Ares Capital (ARCC +2.08%), the biggest business development corporation on the planet, is dangling a 9.9% dividend yield. Sounds tempting, right? Like free money? Listen, if it sounds too good to be true, it usually is. Trust me, I’ve seen empires rise and fall. Mostly fall. And usually over something involving bad accounting.

Ares, you see, finances what they politely call “middle market” companies. What I call companies that conventional banks have deemed too risky to touch. They’ve got 603 of these little ventures in their $29.5 billion portfolio. It’s a bit like being a loan shark with a better publicist. They try to minimize risk with first-lien loans (60.5% of the portfolio) and a sprinkle of second-lien (5%). It’s all very…layered. Like a bad onion. Or a complicated tax shelter.

Now, here’s the rub. Ares’ business thrives when interest rates are just right – not too hot, not too cold. A Goldilocks zone, they call it. Higher rates? Good for profits, bad for the companies they’re lending to. Lower rates? Well, suddenly that massive dividend looks less impressive than a slightly used paperweight. And the Federal Reserve, bless their hearts, decided to play seesaw in 2024 and 2025, lowering rates six times. The result? Ares’ earnings per share dropped from $2.68 in 2023 to a measly $1.86 in 2025. Which, shockingly, doesn’t quite cover that $1.92 dividend. A tragedy! A financial tragedy, I tell you!

The stock looks cheap at 10 times forward earnings, but let’s be honest, there are better places to park your cash. Like, say, Realty Income (O +0.79%). Don’t worry, I’ll explain. It’s my job. I’m a historian, remember? I explain things. Even to people who don’t want to listen.

Why Realty Income Isn’t Building Castles in the Air

Realty Income owns over 15,500 commercial properties in the US and Europe. They buy buildings, rent them out, and share the profits. Simple, elegant, and remarkably less stressful than trying to predict the whims of middle-market companies. They’re one of the biggest real estate investment trusts (REITs) around. Think of it as a landlord empire, but with more paperwork and slightly less shouting.

Both REITs and BDCs have to pay out 90% of their taxable income as dividends. It’s a tax thing. Don’t ask me why. I’m a historian, not a tax attorney. But when interest rates fall, REITs tend to do better. Why? Because it’s cheaper to buy properties and attract tenants. It’s basic economics, people! And I’ve seen a lot of economies.

Realty Income’s top tenants include 7-Eleven, Dollar General, and Walgreens. Solid businesses. People always need snacks, cleaning supplies, and… whatever it is Walgreens sells. Some of their tenants struggled during the pandemic, but the strong ones are picking up the slack. It’s a bit like a medieval tournament – some knights fall, but others keep fighting.

And they’ve maintained an occupancy rate above 96% since 1994! That’s impressive. It’s also one of the few REITs that pays monthly dividends. Monthly! Can you imagine? It’s like getting a little gift every month. And they’ve raised their payout 133 consecutive times. 133! That’s more consecutive anything than I’ve had hot dinners. They yield 5.1% currently. Not bad. Not bad at all.

Realty Income measures its success using adjusted funds from operations (FFO) per share, not just EPS. It’s a fancy metric. They expect AFFO per share to rise to $4.25-$4.27 in 2025, easily covering that $3.22 dividend. The stock trades at 15 times trailing AFFO, which, frankly, seems like a bargain. So, if you’re looking for a solid income play, forget the castles in the air and stick with the brick and mortar. Trust me, I’ve seen enough empires crumble to know which foundations are built to last.

2026-02-10 20:14

Why Realty Income Isn’t Building Castles in the Air

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