Interest rates are on the rise, and the consensus prediction from economists that economic growth should remain robust for the foreseeable future.
That being said, having a solid stable of financials can help offset some of the potential downside from other sectors such as REITs, utilities and other alternative investments which are traditionally negatively correlated with the current bullish interest rate environment.
Here are three hand-picked financial institutions that are well-positioned to take advantage of rising interest rates:
Financial Stocks to Buy: U.S. Bankcorp (USB)
With a market capitalization of $86 billion, U.S. Bancorp (NYSE:USB) is a behemoth, largely representative of the U.S. banking system as a whole. While USB shareholders did take a big hit in the aftermath of the financial crisis, those investors who held onto USB shares following the 2008/2009 crash would have seen some pretty impressive growth (approximately 500% growth since the company bottomed, a little over eight years ago).
The company’s recent earnings release highlighted broad strength across USB’s business segments, with the lender reporting some of the best fundamentals among its peers, with Return on Equity (ROE) coming in at 13.4% and Return on Assets (ROA) coming in at 1.4%.
The bank’s locations are generally spread over the Midwest and West Coast regions of the U.S. market, areas which are expected to continue to outperform should the U.S. economy continue to improve regionally in these areas.
Financial Stocks to Buy: Bank of America (BAC)
One of the largest banks in the United States, Bank of America Corp (NYSE:BAC), has proven to be a stable, steady earner for investors looking to take advantage of an improving U.S. economy and rising interest rates supported by robust economic numbers.
With additional interest rate increases expected and BAC passing the recent stress tests implemented by the Federal Reserve, all indications are that BAC will continue to grow its dividend while providing long-term investors with significant capital appreciation potential as the bank works toward regaining its status as a growth king (BAC still remains more than 50% below its peak right before the financial crisis).
With such a long potential runway providing investors with a realistic path to growth, investors considering BAC have been thrown yet another bone in the form of a dividend increase of 38%, putting the bank’s current dividend yield more in line with its peers at just above 2% currently.
Backed by the Oracle of Omaha himself (currently the bank’s largest shareholder), investors can expect continued stability and excellent growth potential in the medium to long-term with BAC.
Financial Stocks to Buy: Old National Bancorp (ONB)
Looking for a regional bank with greater long-term growth potential? Look no further than Old National Bancorp (NASDAQ:ONB).
As a regional bank, investors looking at ONB will be more exposed to specific regional economic growth trends than the more national trends investors in BAC or USB will be concerned with. The markets ONB has traditionally operated in comprise of a few key states, focused on the Indiana, Kentucky, Michigan and Wisconsin markets.
Since dipping below $10 post-financial crisis, shares of ONB have rebounded significantly of late, showing impressive results since the November Donald Trump election victory — one which took most financial stocks higher in the wake of economic growth promises and increased proposed government spending. While the lender’s share price has lagged somewhat over the past six months, giving up more than 13% over this time frame, investors now have an interesting entry point to consider with ONB, should the bank continue to benefit from economic improvement seen in the four aforementioned States which comprise the vast majority of the lender’s revenue.
With the best dividend of the bunch, currently sitting at around 3.2%, ONB has traditionally distributed more of its earnings back to investors over time, making this the best play for income-focused investors.
As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.