3 Stocks to Buy Before the Fed (Probably) Cuts Rates in September

“The time has come for politics to adapt.”

Those eight words from Federal Reserve Chairman Jerome Powell last week were music to investors’ ears. Powell signaled that next month interest rates could be cut for the first time since March 2020.

While the stock market could rise if interest rates fall, some individual stocks should perform particularly well. Here are three stocks to buy before the Fed (probably) cuts rates in September.

1. Dominion Energy

Utility stocks typically rise when interest rates fall for two key reasons. First, they attract more income investors looking for new places for their money because bond yields fall as rates fall. Second, utilities often have significant levels of debt. Lower rates reduce their cost of borrowing, which increases their profits.

Dominion Energy (D 0.09%) should be a big winner if and when the Fed cuts interest rates. The Virginia-based company provides electricity or natural gas to more than 4.5 million customers in 13 states.

Many investors will be attracted to Dominion’s dividend — and for good reason. The company has paid a dividend for 386 consecutive quarters. Its forward yield is currently 4.7%. Although Dominion cut its dividend by 33% in 2020, I don’t anticipate further dividend cuts.

Dominion could also have pretty good growth prospects for a utility company. Northern Virginia is home to the largest data center market in the world, and with artificial intelligence (AI) fueling the growing demand for data centers, Dominion should be a key beneficiary of the trend.

2. DR Horton

When interest rates go down, mortgage rates usually do too. And when mortgage rates fall, more Americans can afford to borrow money to build new homes. Therefore, rate cuts can provide good catalysts for housing stocks.

Dr. Horton (DHI -1.42%) it is not just any housing stock; has been the largest US homebuilder by volume for over 20 years. The company operates in 118 markets in 33 states. DR Horton builds single-family and multi-family residential homes and rental units and provides mortgage financing and title agency services.

The stock is surprisingly cheap considering the gains it has accumulated over the past few years. DR Horton’s forward earnings multiple is only 12.2. The price-earnings-growth (PEG) ratio, based on five years of estimated earnings growth, is 0.64.

Even if the Fed doesn’t cut interest rates anytime soon, DR Horton should still be a huge long-term winner. The US continues to suffer from an acute housing shortage, and the obvious solution to this problem is to build more houses — exactly what DR Horton wants to do.

3. Real estate income

Real estate investment trusts (REITs) are another obvious beneficiary of rate cuts. These businesses rely on loans to finance the purchase of new properties. When rates are lower, they can finance more growth.

While there are some excellent REIT stocks, Real estate income (A 1.11%) is probably in a league of its own. The company pays a monthly dividend and has increased its dividend payout for a remarkable 29 consecutive years.

Realty Income owns 15,450 commercial properties. Its tenants include well-known firms such as general dollar, Walgreens, Wynn Resortsand FedEx.

The REIT should have strong growth prospects in the US, especially with the increase in the number of data centers. It has an even bigger opportunity in Europe. which represents a total addressable market of $8.5 trillion.