A tip of the cap is in order for my colleague Andy Obermueller, the author of StreetAuthority’s Game-Changing Stocks newsletter. When I joined forces with Andy and the rest of the team here back in 2010, Andy turned me on to an investment niche that I had never heard of before: Business Development Companies (BDCs).

#-ad_banner-#These investments make loans to and investments in a wide range of privately-held companies in need of interim financing. The BDCs pass on almost all of their income to investors, as mandated by law. It’s a great niche, as these firms take on judicious amounts of debt to leverage their returns, creating very high dividend yields.

Although they have historically delivered both strong capital appreciation and solid income streams, the recent past hasn’t been so kind to BDCs. The emerging reality that the Fed would eventually boost interest rates has put pressure on these BDCs — and every other asset class known for high dividend yields.  Indeed, the UBS ETRACS Wells Fargo Business Development Company Index ETN (Nasdaq: BDCS) has moved sideways since its launch in April 2011, even as the S&P has risen 45% in that time. That was bad timing. Prior to this ETN’s launch, BDCs had broadly outperformed the market since 2008. Investors can at least take solace in the fact that this ETN yields more than 7%.

You could look at that recent underperformance another way. These BDCs now price in interest rate hikes that haven’t even begun, and even when rates do rise, the Fed intends to take a very long time to get rates back up to “normalized” levels. Meanwhile, these BDCs sport robust dividend yields that are bound to draw investors back into the fold. For example, my colleague Nathan Slaughter just profiled a BDC with an eye-popping 12.7% yield. I’ve found some other BDCs that hold appeal for other reasons.

The book value play: GSV Capital Corp. (Nasdaq: GSVC)
This BDC focuses on venture capital-stage technology companies, which is a good place to be, in light of the ongoing robust IPO market. The company took pre-IPO stakes such as Twitter, Inc. (Nasdaq: TWTR), Facebook, Inc. (Nasdaq: FB) and others. GSV now focuses on harvesting gains from its next crop of investments, in pre-IPO firms such as Palantir, Dropbox, SugarCRM and Lyft. The development stage nature of the portfolio means that GSV is not yet producing recurring income and therefore, is not a yield play, like other BDCs.

The real appeal of this BDC is the value of this portfolio, which stood at $14.86 a share at the end of the second quarter. That’s more than $4 above the current share price. In effect, you can buy this venture capital portfolio at a sharp discount to book value. To seize on that valuation mismatch, GSV is preparing a $10 million stock buyback, according to JMP Securities. And in the Q2 press release, management noted another shareholder perk coming: “As GSV’s portfolio matures and we realize a cumulative net realized gain, GSV intends to distribute a portion of such gains to shareholders in the form of a distribution.” Such largesse comes from the fact that the company’s ongoing stake in Twitter, which stood at $78 million at the end of the second quarter, is now worth nearly $100 million at current prices  — and Q3 book value is bound to be higher as well.

The insider buying play: THL Credit, Inc. (Nasdaq: TCRD)
Showing the wide variety of BDCs you can own, THL is at the opposite end of the spectrum. It acts mostly as a lender — though sometimes an investor as well — and as it collects interest and principal payments, it can support a steady dividend. That payout has risen to a recent $1.36 a share, suggesting a nearly 10% dividend yield.

The ongoing predictability of the payouts has been tacitly endorsed by insiders. Since the end of 2012 they’ve been steadily acquiring shares, with three insiders making purchases in just the past month alone.  Jonathan Moreland, who tracks companies with insider buying at InsiderInsights.com, notes that THL’s “high yield appears quite sustainable in the short run, at least, based on the fact that the weighted average yield on new debt investments made by THL in Q2 was 11.5%.”

Risks to Consider: BDCs should hold up well if the Fed moves slowly, as expected, with the process of rate hikes. Yet an accelerating economy or signs of surging inflation may lead the Fed to move more quickly, which would diminish the appeal of BDCS and other income-producing investments such as Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs).

Action to Take–> The relative underperformance of BDCs in recent quarters means that they now deliver some of the best yields in the market. It’s wise to spend some time looking at the nature of each BDC’s investment portfolio to ensure that it is well-positioned for the current market environment. GSV Capital tapping into the IPO market, for example, is quite appealing right now. The fact that shares also trade at such a sharp discount to book value makes this my current top pick in the sector.

If BDCs are your cup of tea, then look no further than High-Yield Investing.  This newsletter teaches you how to invest like America’s wealthiest individuals using BDCs. In fact, StreetAuthority just released a report called “Everything You Need To Know About BDCs” — where you’ll learn the seven rules to determine which BDCs to invest in and which to avoid. You’ll also get access to the names and ticker symbols of every BDC that’s traded on the public market. To learn how to get this report for free, click here.