Prediction: The Federal Reserve will cut rates in September, and this ultra-high-yielding dividend stock could rise

A central theme of the economy over the past two years is abnormally high inflation. While politicians are often criticized or applauded for the current state of the economy, the Federal Reserve is actually the institution responsible for setting monetary policy.

In an effort to combat inflation, the Federal Reserve has raised interest rates 11 times in 2022 and 2023. In financial jargon, the “cost” of money is interest. So essentially, borrowing money becomes more expensive and harder to do when interest rates rise. The goal here is to tighten the money supply — effectively slowing economic activity. This should (theoretically!) reduce prices, resulting in reduced inflation.

Currently, the inflation rate in the US is around 2.9%. While that remains high compared to the Fed’s long-term target of 2 percent, it’s a significant improvement from the 9 percent inflation rate of about two years ago. With that in mind, the Fed can finally be ready to start reducing interest rates.

During the Fed’s Economic Symposium a few weeks ago, Chairman Jerome Powell strongly hinted that policy changes are on the way. Honestly, there’s only a finite number of things that could mean, and I think rate cuts are coming this month.

Let’s break down an ultra-high yielding dividend stock that I believe is poised for further growth should rate cuts occur. Now could be a profitable opportunity to pick up stocks.

How would rate cuts bring a newfound rhythm?

The stock I have on my radar is a real estate investment trust (REIT) called Rhythm Capital (RHYTHM -0.17%). The company is an asset manager focused on the real estate industry, providing services such as origination of mortgages for homes, businesses and consumers.

As mentioned above, the cost of borrowing money has become more expensive in the last couple of years. In turn, some areas of economic activity, such as buying a home, undertaking a home improvement project or starting a business, have been affected by higher interest rates. Rithm’s businesses are exposed to these dynamics, leaving the underlying financial trends quite volatile in parallel with a high interest rate environment.

If the Fed does indeed start cutting rates this month, however, Rithm looks well positioned for another hike. The lower cost of capital could inspire more mortgage refinancing or serve as a tailwind for people looking to buy property. Rithm will benefit from these situations and I believe lower rates will finally bring some much needed stability back to the business. But don’t take it from me — Rithm’s CEO is also bullish on the possibility of future rate cuts.

During Rithm’s second quarter earnings call, CEO Michael Nierenberg said, “Looking at the macro picture, we are extremely well positioned for the future and expectations, and given expectations of Fed rate cuts starting in September, this it is very auspicious. for our company. This will help reduce borrowing costs and hopefully lead to higher earnings.”

Image source: Getty Images.

Is now a good time to buy Rithm Capital stock?

As of this writing, Rithm’s share price of $11.50 is not too far from its 52-week high. The effect of the rising stock price can be easily seen in the chart below, reflecting Rithm’s price-to-book (P/B) ratio. Clearly, the company’s P/B of 0.92 is significantly higher than the lows of two years ago. But the weakening of more recent valuation trends over the past two months suggests mixed investor sentiment.

RITM price data to book value by YCharts.

I think there are some related ideas here. For much of 2024, Wall Street economists have been beating each other up calling for more rate cuts. Earlier this year, billionaire hedge fund manager Bill Ackman, among others, suggested the Fed would cut rates several times this year. While that has yet to happen, I think the notion of looming rate cuts has inspired some positivity among the investment community and perhaps influenced some buying activity in companies like Rithm.

However, the chart shows that Rithm’s P/B fluctuated frequently over the summer. While these moves haven’t been overly significant, I see more recent price action as pointing to one thing: uncertainty. Since the Fed hasn’t cut rates yet, I think some investors have chosen to sit on the sidelines until something happens (or doesn’t).

With inflation steadily showing signs of cooling, Chairman Powell’s recent remarks, and insights from Rithm’s own leadership, I think there’s a good chance a rate cut will finally happen in September (with more to come ). If that happens, now could be a great time to pounce on Rithm stock and take advantage of its nearly 9% dividend yield.