No one really knows when the Federal Reserve will begin the next cycle of interest rate cuts. But everyone knows it happens. The Fed will need to start lowering rates as inflation moves closer to a more normalized level.
For investors, this means thinking about which sectors and stocks will benefit the most. And it would be wise to hold these securities before stocks are pushed higher as rate cuts become a reality. Here are two names that should benefit and provide investors with a reliable income stream.
Beat savings again
Many people have real estate investment trusts (REITs) as a source of income. For much of the last decade, most REITs paid higher dividend yields than could be found on savings accounts or bonds. But with interest rates soaring over the past two years, these investments were not a wise solution. income alternative to savings accounts.
This is largely what caused the actions of Real estate income (NYSE:O) to plunge to a multi-year low in late 2023. Shares fell below $50 in October for the first time since the pandemic lows of early 2020. Although Realty Income stock has rebounded from this recent low , it is still trading well below its $64 per share. average over the last five years.
Today, the Fed is expected to be done raising rates. This causes bond prices to rise and, therefore, yields to fall. Investors are therefore now looking for better sources of income. Realty Income fits the bill and its underlying fundamentals are attractive.
In December, Realty Income announced its 123rd dividend increase since 1994. That dividend, paid monthly, recently returned nearly 5% annually, even after the stock price recovered from its lowest levels.
Management is able to increase the payment because the business continues to grow. In the last two months, Realty announced the acquisition of another REIT Spiritual real estate capital in an all-stock transaction valued at approximately $9.3 billion and revealed a new joint venture with Digital Real Estate Trust develop new data centers. Realty Income will hold an 80% stake in this latest deal.
These transactions will add to the diversity of Realty Income’s holdings. Earlier this year, the company also announced its first investment in a major Las Vegas casino. The REIT’s consistency of payouts and continued focus on growth make Realty Income an ideal stock to own in this environment.
Succeeded through market cycles
Brookfield Infrastructure (NYSE:BIPC) is another. Like Realty Income, it hit a four-year low in October, but has recovered strongly from that level. Even accounting for this recent rebound, shares of the owner and operator of a diverse set of infrastructure assets have fallen significantly amid rising interest rates. This is because it relies on borrowing to invest in assets including cell towers, energy, transportation and utilities.
Management was able to add value to investments and then sell them to allocate capital to new growth opportunities. This has led to significant growth in funds from operations (FFO) which it leverages to return capital to shareholders. FFO increased 7% year-over-year in the third quarter and nearly 9% over the past nine months compared to the year-ago period. This followed a 20% annual increase in FFO in 2022.
This helps Brookfield Infrastructure achieve the 5% to 9% annual growth target it has set for shareholder distributions. Based on its past practices, investors should expect another significant dividend increase next February.
Brookfield’s use of debt has led to a more than 30% increase in interest expense for the first nine months of 2023 compared to 2022. This is partly why the stock has largely tracked the broader market this year.
But it could also be an additional catalyst for the stock in the months and years to come. The drop in interest rates will allow Brookfield to refinance its debt at a lower cost. The company has already increased its payouts to shareholders amid recent rising rates. Now is a great time to buy stocks and participate in future economies as the rate cycle reverses in the near future.
Should you invest $1,000 in real estate income right now?
Before buying Realty Income stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Realty Income wasn’t one of them. The 10 selected stocks could produce monster returns in the years to come.
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor The service has more than tripled the performance of the S&P 500 since 2002*.
*Stock Advisor returns December 18, 2023
2 Stocks Poised to Soar When the Fed Cuts Rates in 2024 was originally published by The Motley Fool