Key Points
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Ares Capital has 71% of its portfolio in floating rate investments.
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Starwood Capital’s commercial and infrastructure loan portfolios are predominantly floating-rate debt.
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Laddar Capital primarily invests in floating-rate bridge loans.
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The Federal Reserve is meeting later this week. It will announce its interest rate decision on Sept. 16. With the latest inflation data showing a bigger-than-expected increase in August, the market now sees an 80% chance of a quarter-point hike this week. While a hike isn’t a forgone conclusion, it seems likely.
Higher interest rates are typically bad news for high-yielding dividend stocks. However, some can win either way. Ares Capital (NASDAQ:ARCC), Starwood Property Trust (NYSE:STWD), and Ladder Capital (NYSE:LADR) are among the winners because they primarily invest in floating-rate assets. As a result, their income would rise with rates, while they’d benefit from falling rates on the liabilities side of their balance sheets.
The setup: A real chance of a rate hike and what assets benefit
The Fed’s benchmark overnight interest rate is currently in the 3.5%-3.75% range, which it has held since Dec. 2025 when it cut rates by a quarter point. That’s well below its peak of 5.25%-5.5% from mid-2023 to late 2024.
However, inflation has remained stubbornly high. The U.S. Consumer Price Index (CPI) rose 0.3% in August after excluding food and energy (core CPI; the Fed’s preferred benchmark) to 2.4%. The rise was above expectations for a second straight month and remains well above the Fed’s 2% target. That’s leading Fed watchers to predict the Fed will hike rates at least once this year, with some believing it will make two quarter-point hikes.
That would benefit holders of floating-rate debt, which typically reprices in line with short-term rates. So when the Fed raises its rates, the interest rate on floating-rate debt would also move higher.
Ares Capital
Ares Capital is the largest publicly traded business development company (BDC). It provides direct loans and other investments in private middle-market companies (typically with up to $1 billion in annual revenue). At the end of the second quarter, Ares had a $29.3 billion investment portfolio, 71% of which was in floating rate assets. It has been investing heavily in new floating rate assets. During the second quarter, 94% of its $2.6 billion of new investment commitments were floating-rate debt securities.
However, higher rates aren’t all upside for Ares Capital, as it does have meaningful floating-rate debt on its balance sheet (74% of its $15.9 billion). Its balance on both sides of its balance sheet helps it win whether rates rise or fall. This strategy has enabled Ares to deliver 17 straight years of paying a stable or growing high-yield dividend (a current yield of 9.7%).
Starwood Property Trust
Starwood Property Trust is the largest mortgage REIT focused on commercial real estate financing. Its portfolio consisted of $32.2 billion of assets at the end of the second quarter. Unlike many of its peers, Starwood has a diversified portfolio, with investments in commercial loans (53% of its assets), owned properties (21%), infrastructure lending (9%), residential lending (8%), and other assets (9%).
Most of its loan portfolios consist of floating-rate debt. For example, 97% of its $17.3 billion commercial lending portfolio and 96% of its $3.6 billion infrastructure lending portfolio are floating rate debt. The REIT constructed its predominantly floating-rate loan portfolio to outperform in both higher- and lower-interest rate environments. That has helped support its ability to pay a stable high-yield dividend for over a decade (12.3% current yield).
Laddar Capital
Laddar Capital is also a mortgage REIT. It has $5.8 billion of commercial real estate investments, including loans (49%), securities (33%), and equity (18%). Its primary business is originating senior secured first-mortgage loans on commercial real estate, with a focus on short-term, floating-rate bridge loans for properties undergoing renovations or in lease-up.
Meanwhile, the REIT’s high-quality securities portfolio features short-duration bonds secured by first mortgages on commercial real estate. It has the flexibility to rotate out of these assets and into new loans, based on market conditions. Laddar Capital has historically reduced its securities portfolio and increased its loan portfolio when rates rise and reversed that trade when they fall. The REIT aims to optimize its portfolio mix to 65% loans and 20% securities in the future, which would support earnings and dividend growth (9.6% current yield).
Insulated either way
We should have a clear direction on interest rates when the Fed meets next week. Ares Capital, Starwood Property Trust, and Ladder Capital are in solid positions, whatever it decides, thanks to their emphasis on floating-rate debt. While higher rates aren’t pure upside catalysts, they’re less of a downside risk for this group compared to other high-yielding dividend stocks. That makes them ideal holdings no matter what the Fed decides next week.
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Matt DiLallo has positions in Ares Capital, Ladder Capital, and Starwood Property Trust. The Motley Fool has positions in and recommends Ares Capital and Starwood Property Trust. The Motley Fool has a disclosure policy.