An Idea to Fight Inflation That Actually Works

In late 2021, when it became apparent that inflation would stay persistent and increasing, I started to get a lot of questions about where to invest.

When inflation rears its ugly head, there is no magic list of investments that help you beat inflation all of the time. While it would be good if there were such a list, I advised looking for companies and stocks that would see profits grow with higher interest rates.

One particular idea I shared has proven to work out very well…

For many months, as inflation took off, the Federal Reserve continued to call the inflation “transitory” and kept interest rates low. While the Consumer Price Index was pushing 8% as early as February, the Fed did not get serious about raising interest rates until April, and the fed funds rate didn’t go above 1.0% until June.

As a result, for those companies that benefit from higher rates, the increases in interest rates have lagged inflation by many months. Only now, as third-quarter earnings come out, do we see the effects of higher rates. In the meantime, the stock market has double dipped into bear market territory, putting us at a point at which these companies are ratcheting up profits and dividends while, at the same time, share prices are low.

Business development companies (BDCs) provide financing solutions for small-to-medium-sized corporations. BDCs operate under special laws that require them to pay out 90% of net investment income as dividends. As a result, BDC shares sport very attractive yields.

Almost all BDCs make variable-rate loans to their client companies. The BDC rules also require a BDC to maintain a low debt-to-equity capital structure. The structure allows a BDC to generate growing net interest income as interest rates increase.

The effects of higher rates kicked in during the 2022 third quarter. BDC dividend increases have been hitting my inbox almost daily. It’s gotten a level at which, if you own shares of a BDC that hasn’t increased its dividend, I would look at selling and investing in one that is now growing its payout.

Here are the four largest BDCs by market cap, with their most recent dividend changes:

On October 25…

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