On Jul 31, Federal Reserve Chairman Jerome Powell announced a 25-basis point rate cut, setting a new target band between 2% and 2.25%. The reduction was in keeping with the expectations of market pundits, but failed to live up to investor expectations. Major indexes closed in the red after the Powell made it clear that this was not the beginning of a rate cut cycle.
However, central bank policymakers kept the door open for future rate cuts, including at least one later this year. This is likely to benefit rate-sensitive stocks such as real estate investment trusts (REITs) and utilities, since debt servicing will become much easier for them. Adding these stocks to your portfolio makes for a smart choice.
Fed Keeps Door Open for Future Cuts
Following the Fed’s decision, Powell stated that the decision to reduce rates was attributable to “implications of global developments for the economic outlook as well as muted inflation pressures.” At the same time, he stressed that the reduction was only a “midcycle adjustment.” Any further decision would depend on the “nature of economic data flowing in.”
However, Fed policymakers also specified that they will “act as appropriate to sustain the expansion,” leaving the door open for future rate cuts.
Interest-sensitive stocks are influenced by changes in interest rates. They consist of financial institutions and businesses that pay out high dividends. As we know, stocks in general are sensitive to interest rate changes — lower interest rates mean lower interest rate expenses on borrowed capital. Low interest rate also affects the valuation of businesses.
Some sectors are particularly benefited by a reduction in interest rates. When interest rates fall, these sectors can provide higher returns to investors as they increase dividends. They are able to do this since they now find it easier to service their debt.
Utility companies are characterized by long gestation periods and a heavy debt component as far as capital allocation is concerned. What they often lack in share price appreciation is made up by stable dividend flows. A reduction in rates makes debt servicing much easier for such stocks, enabling them to pay out higher dividends.
REITs also depend heavily on debt-fueled financing to drive their businesses. This is why a reduction in rates is equally helpful for them. Such players are also appealing to investors owing to their attractive dividends and strong earnings growth.
6 Winning Stocks
The Fed has disappointed investors by announcing only a quarter point rate cut. Comments from the Fed chair have also led to concerns about future monetary easing. However, the Federal Reserve has kept the door open for future rate cuts.
This is why it makes sense to invest in rate-sensitive stocks. REITs and utilities not only offer dividends but also are useful during such conditions. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Unitil CorporationUTL is a publicly traded utility company that serves New Hampshire, Massachusetts and Maine with electricity and natural gas.
Unitil’s expected earnings growth for the current year is 4%. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 30 days. The stock has a dividend yield of 2.5% and currently holds a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alliant Energy Corporation LNT is a public utility holding company that generates and distributes electricity, and distributes and transports natural gas in Iowa.
Alliant has a Zacks Rank #2. The company’s expected earnings growth for the current year is 3.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the past 60 days. The stock has a dividend yield of 2.8%.
MGM Growth Properties LLC MGP is a real estate investment trust that invests in large-scale destination entertainment and leisure resorts.
MGM’s has a Zacks Rank #2. The company has expected earnings growth of 2.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 30 days. The stock has a dividend yield of 6.4%.
Mid-America Apartment Communities, Inc. MAA is a publicly traded REIT located in Memphis, TN dealing with apartments in the Southeast and Southwest United States.
Mid-America Apartment has a Zacks Rank #2. The company’s expected earnings growth for the current year is 3.3%. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 30 days. The stock has a dividend yield of 3.2%.
Brixmor Property Group Inc. BRX is a publicly traded REIT dealing with shopping centers.
Brixmor’s has a Zacks Rank #2 and expected earnings growth of 2.7%for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 60 days. The stock has a dividend yield of nearly 6%.
AvalonBay Communities, Inc. AVB is a publicly traded REIT dealing with shopping centers.
AvalonBay has a Zacks Rank #2. The company’s expected earnings growth for the current year is 3.78%. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past 90 days. The stock has a dividend yield of 3%.
Today's Best Stocks from Zacks
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Alliant Energy Corporation (LNT) : Free Stock Analysis Report
Unitil Corporation (UTL) : Free Stock Analysis Report
Brixmor Property Group Inc. (BRX) : Free Stock Analysis Report
Mid-America Apartment Communities, Inc. (MAA) : Free Stock Analysis Report
AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
MGM Growth Properties LLC (MGP) : Free Stock Analysis Report
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