As the Federal Reserve has indicated its willingness to keep interest rates higher for longer, the broader stock market has struggled with predicting the effects of rates staying up and also trying to predict when the Fed will get around to the initial rate reductions. Investors can take advantage of the higher-for-longer meme by investing in those high-yield stocks that benefit from rates staying up.

Business development companies (BDCs) operate under special rules that limit the leverage they can use and require these companies to pay out 90% of net investment income as dividends to investors. A BDC makes loans to small-to-medium-sized corporations and possibly equity investments.

BDC loan portfolios are almost entirely adjustable-rate loans to their client companies. Since these companies (the BDCs) don’t have much debt, net interest income grows as interest rates increase. The BDC sector has done tremendously well over the last two years as the Fed went with its steepest trajectory of rate increases in history.

I have four BDC stocks in the Dividend Hunter portfolio. They did tremendously well in 2023. I appreciated that they did not jack up their regular dividend rates; instead, they paid supplemental rates to share the high-rate benefits with shareholders. As a result, investors can count on continuing to receive the regular dividends if and when rates start to come down. That doesn’t mean regular dividends haven’t also increased. Three out of the four recommended BDCs are growing their regular dividends.

There are about 50 companies in the BDC universe. I like to use actively managed ETFs as a source for individual stock ideas. The top 10 Putnam BDC Income ETF (PBDC) holdings would be a good place to start your research. Several of my favorites are on that list.

Runway Growth Finance Corp. (RWAY) is a relatively new BDC that recently included a $0.07 per share on top of its regular $0.40 dividend. The shares went ex-dividend last week. I use it as an example because RWAY yields 11% on the regular dividend, and the supplemental dividend is bonus income.

I regularly discuss how BDCs operate in my Dividend Hunter newsletter subscribers. If this is a new high-yield category for you, or you want to get smarter about these interesting companies, grab a subscription today.