10 Best Stocks for Rising Interest Rates
The Federal Reserve has signaled in no uncertain terms that interest rates will head higher in 2022. Here are 10 of the best stocks for this environment.
In March, the Federal Reserve raised benchmark interest rates for the first time since 2018. And in the intervening weeks, Fed Chair Jerome Powell has been increasingly clear that even higher rates may be on the way soon. That has investors scrambling to scrape up the best stocks for rising interest rates.
Speaking on March 21, Powell said the central bank will move "expeditiously" and "more aggressively" towards higher interest rates. That has left little doubt in the minds of many investors about what's in store for the markets in the coming months.
To be clear, rates are still relatively low even after all this. The effective federal funds rate now sits at 0.33% instead of 0.08% prior, but that's not even within earshot of rates from prior decades that were several full percentage points higher.
Furthermore, rising rates should never be seen as a death knell for the economy. In fact, the presence of rate increases is because the Federal Reserve sees inflation as a bigger risk to the U.S. economy than the burden of higher borrowing costs. If businesses and consumers weren't churning along, there would be concerns of how these rate hikes would be absorbed, keeping Powell and other policymakers in check.
There are certainly changes that are afoot as a result of higher interest rates, but investors should not make the mistake of thinking these moves means you should abandon the stock market entirely. Indeed, several of the best stocks for 2022 had the potential for rising rates on the mind, and today, we'll be looking at a few that are tailor-made for this environment.
Here are 10 of the best stocks for rising interest rates. The potential options presented here are for those concerned about mitigating the impact of rising interest rates throughout 2022.
Data is as of April 3. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
- Market value: $4.7 billion
- Dividend yield: 8.2%
An iconic name in asset management, AllianceBernstein (AB, $47.83) is among the best stocks for a rising-rate environment for a number of reasons.
Most obviously, the financial stock has roughly $780 billion in total assets under its belt, meaning a modest rise in rates means it can put idle cash to better use in interest-bearing assets.
And with a best-in-class fixed income division that might be in demand as investors look to navigate the current environment, these tailwinds are sure to benefit AB shareholders.
It's also important to note that a rising-rate environment also will create more volatility generally in capital markets as Wall Street reshuffles its priorities. That is normally a good thing for elite firms like AB, both because it provides opportunities for its shrewd managers to cash in and because many high-net-worth investors tend to start shopping around for firms like this one to get ahead. Furthermore, the institutions that use AllianceBernstein – including estates, government agencies, charitable organizations and corporations – are going to be asking for advice and insights now more than ever.
AllianceBernstein has also used M&A over the years to improve its offerings. For instance, it made headlines in March by announcing the acquisition of a global private alternative investment manager, CarVal, for $750 million as it expands operations. And in 2019, it also picked up fintech firm Autonomous Research to better diversify its revenue stream and bolster its research operations.
- Market value: $10.4 billion
- Dividend yield: 7.9%
Ares Capital Corporation (ARCC, $21.35) is a business development company, or BDC. This kind of stock is a bit like a publicly traded company that operates as a private equity firm, offering investors a way to pool their resources and take advantage of targeted opportunities that ARCC thinks will deliver outsized returns.
Specifically, Ares Capital engages in acquisitions, recapitalizations, restructurings and "rescue financing" of mid-sized companies that typically are between $20 million and $200 million in market value. In other words, these are Goldilocks companies that are neither too small to be meaningless nor too big to be able to access capital markets in a way that an entrenched blue-chip stock could.
Particularly interesting is the so-called "unitranche" structured investments where Ares goes all-in to be the first and only lender, giving it a powerful seat at the table when it comes to negotiating with management or ensuring its loans are paid in the event of a default.
With a rising-interest-rate environment, obviously Ares can command higher returns for the loans it offers midsized firms. And ARCC stock has outperformed the broader S&P 500 year-to-date as a result, up marginally versus the index's nearly 5% loss.
Plus, the company offers a best-in-class quarterly dividend of roughly 8% after a recent bump to 41 cents a share – sign that this company is dedicated to sharing its success with its public stakeholders.
When you add all of that up, it's easy to see why ARCC is one of the best stocks for rising interest rates.
- Market value: $2.7 billion
- Dividend yield: 1.7%
Regional financial firm BancFirst (BANF, $83.42) might not be the best-known financial stock out there. However, this nearly $3 billion regional bank is worth a look right now thanks to its stable operations offering consumer and commercial banking services through roughly 110 branches largely in the Oklahoma area.
What makes BancFirst attractive is the potential for higher net interest income (NII) on its portfolio of loans to homeowners, farmers and small business owners. NII is one of the big tailwinds provided to financial firms in a rising-rate environment, as they can gain better returns on their balance of cash while also generating higher rates of returns from customers who come in for loans.
The proof is in the performance of BANF stock, which has surged an impressive 18% so far in 2022 to torch the financial sector's 2% year-to-date losses. Fueling those gains was a top- and bottom-line beat in its fourth-quarter earnings report, released in late January.
Also, recent dividend growth shows this financial stock is committed to returning that capital to stockholders. BancFirst was paying a split-adjusted 19 cents per quarter in 2017, and now pays almost twice that at 36 cents per share each quarter.
- Market value: $22.2 billion
- Dividend yield: 2.0%
Ohio-based insurance firm Cincinnati Financial (CINF, $138.07) is perhaps not the first insurance stock most traders would think of if you're interested the financial sector. However, long-term income investors should be very familiar with this name because CINF boasts one of the most incredible track records of dividend growth on Wall Street.
Specifically, CINF has increased its dividend at least once annually for the past 62 consecutive years, making it one of the oldest of the Dividend Aristocrats.
In addition to being the poster child for dividend growth, Cincinnati Financial is also a great example of a well-run insurer that fundamentally benefits from a rising-rate environment. That's because it cashes in on the "float" on premiums that clients pay in before a claim is filed and that money has to go out again.
Obviously, it would be incredibly risky for an insurer to invest premiums in aggressive strategies. But short-term interest-bearing assets like U.S. Treasury bonds are as good as cash for many CFOs at these insurance firms. And when rates rise, this idle cash sees a better return.
CINF stock has tacked on 21% so far in 2022 thanks in part to this prospect of an interest-rate tailwind, but also because it's a low-risk stock that will do well in any market environment. After all, businesses will keep paying for liability insurance and individuals will keep mailing in their life insurance premiums regardless of whether there are short-term swings in the U.S. economy.
That's why Cincinnati Financial should remain one of the best stocks in 2022's rising-rate environment.
Discover Financial Services
- Market value: $31.1 billion
- Dividend yield: 1.8%
Discover Financial Services (DFS, $110.12) was once thought of as an also-ran in the credit card game by some when it was founded in the 1960s. But the company is now a $30 billion-plus consumer lending powerhouse that stands shoulder to shoulder with peers such as Visa (V) and American Express (AXP). As of the end of last year, the company boasted $74 billion in Discover card loans but also a rapidly growing digital banking division with more than $61 billion in consumer deposits.
Discover is one of the best stocks for a rising-rate environment as it can also increase the rate it charges for outstanding balances on credit card loans and generate a return on the idle deposits under its purview. But it's also good for the growing lending arms at DFS outside of its credit card business. Right now, DFS has about $10 billion in student loans and another $7 billion in personal consumer loans.
While revenue expansion is expected to only run in the mid-single digits for FY2022 and FY2023, earnings per share are set to surge a stunning 20% to 25% this year, according to recent forecasts.
Better margins will help Discover accelerate its profitability much faster than its revenue growth, thanks in part to rising rates. And the fact that the red-hot economy is experiencing strong spending trends right now should also help to provide a tailwind to DFS in the months ahead.
- Market value: $28.8 billion
- Dividend yield: 0.7%
Credit data and analytics provider Equifax (EFX, $234.13) is one of the three national credit bureaus that are effectively gatekeepers on nearly all consumer lending. And in a rising =0rate environment where loans are going to cost a bit more and consumers are eager to get their scores as high as possible to secure the best deal, EFX is very likely to see an uptick in demand for its services.
Additionally, in the last year or so, EFX has made a series of small but important acquisitions to widen its moat further in the lending and financial services space. All in all, the firm notched eight acquisitions for about $3 billion in 2021. And it followed that up with two more so far in 2022 – employer solutions provider Efficient Hire and Latin American credit reporting agency Data-Crédito – to further its expansion plans.
Thanks in part to these buyouts, EFX is plotting nearly 10% revenue expansion both in the current fiscal year as well as in 2023. What's more, a rising-rate environment coupled with these business-building acquisitions should really help this stock stay dominant in the long term.
Extra Space Storage
- Market value: $28.1 billion
- Dividend yield: 2.4%
Perhaps the quirkiest play on this list of the best stocks for rising interest rates is Extra Space Storage (EXR, $209.57), a Utah-based real estate investment trust (REIT). This special class of company has to deliver 90% of taxable income back to shareholders in exchange for preferential tax treatment, which means a mandate for big dividends and typically features more conservative capital management as a result.
So why is this a rates play? Well, with some 1,900 self-storage sites in 40 states – making it one of the largest self-storage management companies in the U.S. – EXR is a massive real estate company. And as anyone who has a mortgage knows, real estate is incredibly sensitive to interest-rate trends.
Extra Space increased its debt load significantly over the last few years, finishing 2021 with $6.0 billion in long-term debt, up from almost $5.6 billion in 2020 and $4.8 billion the prior year. However, if rates rise, that means this investment was very well timed and EXR has locked in lower interest rates for its significant real estate holdings.
What's more, unlike some over-extended REITs, EXR's total debt load remains comfortable at just over 60% of total assets, so it's not like this company broke the bank here. It also enjoys an investment-grade rating on its debt (signaling it is less likely to default than other firms in the space) and an impressive 96% occupancy rate across all properties to support operations.
If inflationary trends do come to pass, and along with them rising interest rates, EXR will be in the enviable position of having lower rates on its real estate loans but an opportunity to increase storage rates to its clients.
Investors have already shown a lot of enthusiasm for this well-run company, bidding up shares by about 55% so far over the last 12 months. And Extra Space has further rewarded shareholders with a 25% increase in its quarterly dividend last September. That gives EXR a decent 2.4% yield at current pricing despite its stellar run.
If interest rate tailwinds lift margins in 2022, this REIT could be one of the best stocks you can hold.
- Market value: $2.6 billion
- Dividend yield: 3.8%
Mainly a provider of student loan services, including federally subsidized loans through the U.S. Department of Education, Navient (NAVI, $17.05) is a great example of a focused play that could directly benefit from any rising interest-rate environment.
Admittedly, student loans are not the most enjoyable subject – in large part because of the ever-increasing cost of a college education in the U.S., coupled with the vagaries of financial law that means these debts are incredibly difficult to discharge. However, NAVI presents a unique opportunity for investors to profit from this arena, even if you don't agree with them.
To begin with, talk from the White House about plans to write off student loan debt for millions of Americans has ultimately come to nothing – and thus, the core business of NAVI remains unchanged.
Furthermore, thanks to a rising-rate environment Navient is likely to see higher net interest margins in the years ahead. Throw in a better general economic and hiring outlook as we move past COVID, meaning families can have confidence the job market will justify a pricey college degree, and it's no wonder that shares are up roughly 70% from their January 2021 lows.
While not the most dynamic company, with rather flat top-line performance expected over the next year or two, NAVI does pay a generous 3.8% dividend at current pricing and continues to accelerate its earnings per share thanks to operational efficiencies. Rising rates could deliver another win for this stock, and help it add to recent outperformance.
- Market value: $4.9 billion
- Dividend yield: 2.4%
PacWest Bancorp (PACW, $42.57) is a roughly $5 billion regional bank that operates about 70 full-service branches, located mainly in California. This is a real bread-and-butter financial stock, offering various products and services such as auto loans, mortgages, savings accounts and ATMs.
It's not particularly sexy, but this kind of banking activity is the lifeblood of local economies. And as the U.S. economy gets back on its feet, these services are increasingly in demand. Therefore, a rising-rate environment will give PACW a further shot in the arm as its net interest margins on car, home and business loans improves in kind.
As proof of that, look at PacWest performance since the pandemic. In the past 24 months, PACW stock has exploded nearly 160% higher – though the stock has gone through the same volatility in 2022 as the rest of Wall Street. But 2021 earnings per share hit $5.10 – almost 160% higher than pandemic-affected profits in 2020 and up more than 30% from 2019 before the adverse impacts of COVID, so clearly, this regional bank stock has found its footing.
In January, shares hit their highest levels since 2018 thanks to continued operational improvements. And looking forward, this regional banking name could be one of the best stocks of 2022 amid rising interest rates.
- Market value: $44.7 billion
- Dividend yield: 1.9%
Property and casualty insurance giant Travelers (TRV, $185.25) replaced financial giant Citigroup (C) in the Dow Jones Industrial Average back in 2009. And at the time, many folks were scratching their head at why the company got the nod to join this elite group of 30 companies when so many other picks were out there to choose from.
Well, for starters, it was a way to diversify the index out of core capital markets financials and into a less sexy but more reliable area of finance. Also, at nearly $45 billion in market value, Travelers is a powerful representative of the insurance industry: It offers a wide array of protection products for everything from trucks to boats to homes, as well as business services that include liability coverage and insurance for bonds and other financial services.
If you're looking for a low-risk stock, Travelers is worth a look because of its reliable revenue stream from premiums and its unrivaled scale. But it's also worth a look because it's one of the highest-flying stocks on Wall Street despite a down market this year.
TRV has tacked on 16% so far in 2022 despite challenges for the broader market in part because of this tailwind. Although revenue is only predicted to grow in the mid-single-digit range for both fiscal 2022 and fiscal 2023, earnings are set to grow significantly faster. And when you throw in a roughly 2.0% dividend that's still higher than the S&P 500's yield, there's plenty of reasons to like Travelers right now.