Interest rates are rising. On March 16, the U.S. Federal Reserve raised interest rates for the first time since 2018 and signaled that a total of six rate hikes are likely to happen throughout this year. After keeping its benchmark interest rate near zero since the onset of the Covid-19 pandemic, the American central bank raised its benchmark interest rate by 25 basis points. That brings the rate into a range of 0.25% to 0.50%.
The move by the Fed has prompted a hike in the prime rate charged by most financial institutions and has sent financing costs higher for consumer borrowing and credit. So, what are the right stocks to buy now that the Fed has started raising rates?
Here are three suggestions for consideration.
Stocks to Buy: Bank of America (BAC)
Banks earn the bulk of their revenue from interest charged on various loans — from home mortgages to credit cards. So it is easy to see that banks perform better in high interest rate environments. As the Fed raises rates, it enables banks to also raise the rates it charges on loans that are tied to the prime, or Federal Funds, rate.
While all U.S. banks should do well with interest rates marching higher this year, Bank of America is well-positioned to outperform. Not only is Bank of America the second largest lender in the U.S. after JPMorgan Chase (NYSE:JPM), but it is also extremely well-run and has a great balance sheet.
In addition to rock solid earnings and a strong presence on Main Street through its network of retail bank outlets and ATM machines, Bank of America also offers a strong dividend and share repurchase program. Last summer, Bank of America announced a dividend hike of 17% to 21 cents per share. Its current forward dividend yield stands at 1.96%. Plus, Bank of America renewed its $25 billion share buyback program last year.
In 2021, the lender returned a total of $31.7 billion to shareholders in the form of buybacks and dividend payouts. BAC stock is down merely 1% year to date at $44.03 a share. Investors should view the pullback as a buying opportunity.
Walmart (WMT)
Walmart happens to be a consumer staple stock that performs well when interest rates rises. These are stocks of companies that sell essential items that consumers are likely to keep buying even with prices on the rise. Think food, hygiene products and household goods.
Consumer staples differ from discretionary items that consumers are likely to live without when prices are increasing. The essential nature of consumer staples gives the companies that sell them pricing power, meaning they can charge higher prices without losing customers.
And among those consumer staples, Walmart is the king. The world’s biggest retailer with more than 10,500 stores in 24 countries and 2.3 million employees. It has a pricing power to spare — thanks to its commitment to keeping prices lower than its competitors.
The retailer can be expected to outperform even as interest rates rise. So far this year, WMT stock is flat, down only a slight 0.6% at $143.75 per share. But over the last year, the share price has increased 10% with more gains likely.
Stocks to Buy: Allstate (ALL)
Insurance stocks also excel when interest rates climb higher. Among those insurance companies, Allstate is a top pick. This is because insurers reinvest their policyholder premiums into bond instruments, allowing them to profit when Treasury yields rise. Insurers tend to perform worse in low-rate environments because their underlying bond investments yield weaker returns.
Additionally, most people are unlikely to give up their home, auto and life insurance policies in either an inflationary or higher rate environment. In many jurisdictions, insurance, such as for automobiles, is required by law.
The Northfield Township, Illinois-based company has forecast a strong rebound this year coming out of the pandemic, estimating 32% earnings growth. Additionally, Allstate stock provides a decent forward dividend yield of 2.55%, and is attractively valued with a trailing price-to-earnings (P/E) ratio of 7.27. So far in 2022, ALL stock is up 16% at $137.15 a share, outperforming the broader market for the year. Over the past 12-months, the share price has gained 21%.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
