The best stocks to buy for a Fed rate cut

VaselineAugust 10, 2024

0 5 minutes read

The best stocks to buy for a Fed rate cut

At its policy meeting in July, the Federal Open Market Committee (FOMC) left interest rates unchanged, but Federal Reserve Chairman Jerome Powell indicated in the subsequent news conference that a September rate cut could be on the table.

Recent data pointing to a slowing economy has also raised expectations that the central bank will start cutting interest rates sooner rather than later.

Indeed, according to the CME Group’s FedWatch tool, futures traders are 47% likely to set the price Federal Reserve will cut rates by a quarter of a percentage point at its next meeting in late September – and a 54% chance it will cut the federal funds rate by 50 basis points (0.50%).

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And cuts are expected to continue during subsequent Fed meetings until the federal funds rate reaches its 2026 average target of 3.1 percent, as stipulated by the central bank. Summary of Economic Projectionsor “plot point”.

These are not binding predictions, of course, but suggest an FOMC outlook that favors lower rates in the very near future.

So how should investors prepare for lower interest rates and the potential for further cuts at the Federal Reserve in the coming months?

The following five stocks are all good options for investors to consider because they generally benefit from lower interest rates. Moreover, each is showing particular strength in operations right now.

AbbVie

Outside an AbbVie building in Illinois

(Image credit: Jamie Kelter Davis/Bloomberg via Getty Images)

Section: Health
Market value: $335.0 billion
Dividend yield: 3.3%

You might not think so health stock would be first in line to benefit from a discussion of rate cuts, but AbbVie (ABBV) is a great example of a company that can benefit from cheaper borrowing costs that come from lower interest rates. That’s because AbbVie has strong and reliable cash flow of more than $22 billion annually, along with a significant debt load of about $70 billion.

In general, companies with financial footprints like AbbVie can borrow a little more freely (and more cost-effectively) when rates fall. This may include issuing new corporate bonds as well as restructuring existing debt for a more favorable payment schedule. As a research-oriented pharmaceutical company, ABBV needs cash on hand to fund potential treatments in its product line; lower rates allow it the financial margin it needs to do so.

And if the rates don’t move a bit? No sweat. AbbVie is one of the top five pharmaceutical companies by revenue, so it’s not going anywhere. Additionally, it is one of the best dividend stocks for reliable dividend growth and offers a generous 3.3% yield.

Constellation Energy

rows of solar panels

(Image credit: Getty Images)

Section: Utilities
Market value: 59.3 billion dollars
Dividend yield: 0.8%

A very different business, but perhaps one that requires even more capital is Constellation Energy (CEG), a utility stock which focuses on renewable energy generation. The company operates about 33,000 megawatts of generating capacity consisting of nuclear, wind, solar, natural gas and hydroelectric assets – as you can imagine, building more dams, solar arrays and wind farms doesn’t come cheap. Lower cost funding will mean an easier path to growth for CEG.

It’s also worth noting that the current high interest rate environment hasn’t held Constellation back. The stock is up 80% over the past 12 months on a total return basis (price change plus dividends) – an amazing performance for a stock in a typically sleepy sector of Wall Street.

And high-powered applications such as artificial intelligence (AI) and crypto mining are increasing demand for utilities. Plus, CEG’s focus on renewable energy positions it well in an era of climate change, it’s easy to see why investors are bullish on this stock.

That success came even as the Fed kept interest rates at their highest levels in about two decades, so a drop in key lending rates could help spark a continued rally in stocks.

Ford Motor

Ford logo 2

(Image credit: Getty Images)

Section: The discretionary consumer
Market value: 40.2 billion dollars
Dividend yield: 5.9%

Ford Motor (F) was one of several automakers to scale back production of its long-awaited electric vehicle (EV) fleet over the past year. That’s because the current EV economy is a bit more challenging than executives had hoped. For example, higher borrowing costs are causing headaches for car buyers as well as car makers who have to retool factories to accommodate the change.

But make no mistake, the future of cars is electrified—and, as evidenced by the all-electric Ford Lightning F-150 and Mustang Mach-E, the company is steadily moving in that direction. It just needs a little more stimulus to pick up the pace, and a drop in interest rates can help it do just that.

With more than $100 billion in long-term debt, interest rates matter as much as product mix for an automaker like Ford.

Verizon Communications

Verizon logo on a phone, sitting on a computer keyboard.

(Image credit: Omar Marques/SOPA Images/LightRocket via Getty Images)

Section: Communication services
Market value: 171.4 billion dollars
Dividend yield: 6.6%

Verizon Communications ( VZ ) has even more debt than Ford — about $173 billion, according to Morningstar. As such, the telecom giant is another example of a large company with stable cash flows and a strong balance sheet that would benefit from cheaper financing through lower-interest debt.

Operating the largest wireless network in the US, with approximately 115 million subscribers, is not a cheap business model. Additionally, even as Verizon invests in upgrading and maintaining its wireless network, the company is spending aggressively on fiber-optic connectivity for homes and businesses with more than 57,000 miles of fiber held since 2020.

VZ is the bluest of the blue chip stockswith a massive market capitalization and a generous 6.6% dividend, so it’s not going anywhere. But lower interest rates may help it maintain an edge going forward.

Welltower

Welltower logo on smartphone with blurred logo and background

(Image credit: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

Section: immobility
Market value: 71.6 billion dollars
Dividend yield: 2.3%

Senior Housing Specialist Welltower (GOOD) is one of the many real estate stocks that will benefit from rate cuts. This is because lower interest rates will reduce borrowing costs for those looking to buy new land or build new facilities. Unlike some of the riskier plays in real estate, however, WELL stock is doing quite well, even in a higher rate regime.

Specifically, occupancy of its properties is improving, while cost pressures are easing. One recent business update for investors, Welltower increased its dividend payout by 10% and now boasts a healthy 2.3% yield. In addition, WELL garnered guidance for its funds from operations, a key measure of financial health for real estate investment trusts (REITs).

It’s hard to bet against the persistent demographic trend of aging Americans, so there’s a clear long-term case for Welltower. And with shares up nearly 40% over the past 12 months on a total return basis – outperforming the S&P 500 – and the prospect of lower rates likely to boost performance in the coming months, there’s clearly reason to consider this as one of the top stocks. to buy for a Fed rate cut.

VaselineAugust 10, 2024

0 5 minutes read

Vaseline

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