One of the most prominent themes of monetary policy over the last few years is an intense scrutiny on interest rates — and for good reason. In 2022 and 2023, the Federal Reserve hiked interest rates 11 times in an effort to stifle abnormally high levels of inflation.
Although inflation still persists, the current level of 2.9% has materially cooled from its high points during the summer of 2022. The current picture surrounding unemployment data and inflation trends has many economists forecasting that rate cuts may finally be on the horizon. Even Fed Chair Jerome Powell strongly suggested that changes in policy were imminent in a speech he gave in Jackson Hole, Wyoming a couple of weeks ago.
There are many types of businesses that could benefit from reductions in interest rates. In particular, I’ve been looking closely at business development companies (BDCs). Let’s break down the ins and outs of BDCs and look at the ultra-high-yield BDC stock I have on my radar right now.
What are business development companies?
BDCs are pretty interesting. At their core, they’re capital providers to early-stage businesses looking for funding to get their operations off the ground. Furthermore, some BDCs, such as Ares Capital, offer more sophisticated financing solutions — making them appealing to larger public companies as well.
You might be wondering if a BDC is just a fancy term for a bank. Well, not exactly.
BDCs have an unusual corporate structure in that 90% of taxable income is distributed to shareholders on an annual basis. For this reason, BDCs tend to be a favorite for those looking for dividend income.
The chart below illustrates the dividend payments for Hercules over the last 10 years. For the most part, Hercules has not only consistently paid a dividend, but it’s also raised its quarterly and supplemental-dividend payments. The notable exception was a brief cut to the supplemental dividend in early 2020 at the beginning of the COVID-19 pandemic (seen in the grey-shaded column).
HTGC Dividend Chart
However, not all BDCs are created equal — far from it. Many BDCs focus…
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