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 (while also trying to predict when the Fed will get around to the initial rate reductions). Runway Growth Finance Corp. (RWAY) is an investment I like here, writes Tim Plaehn, editor of The Dividend Hunter.
Why? Business development companies (BDCs) operate under special rules that limit the leverage they can use and that 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. Yet that doesn’t mean regular dividends haven’t also increased. Three out of the four recommended BDCs are growing their regular dividends.
Runway Growth Finance Corp. (RWAY)
RWAY is a relatively new BDC that recently included a $0.07-per-share payout on top of its regular $0.40 dividend. The shares went ex-dividend recently. I use it as an example because RWAY yields 11% on the regular dividend, and the supplemental dividend is bonus income.
Recommended Action: Buy RWAY.
