Nobody really knows when the Federal Reserve will begin the next cycle of lowering interest rates. But everyone knows it is coming. The Fed will have to begin dropping rates as inflation gets closer to a more normalized level.
For investors, that means looking ahead at what sectors and stocks will benefit the most. And it would be smart to own those names before shares are bid higher as rate cuts become a reality. Here are two names that should benefit and give investors a reliable stream of income to boot.
Beating savings once again
Many people own real estate investment trusts (REITs) as a source of income. For much of the past decade, most REITs paid higher dividend yields than one could find in savings accounts or from bonds. But with interest rates soaring over the past two years, these investments were not a smart income alternative to savings accounts.
That is much of what caused shares of Realty Income (O +0.70%) to plunge to a multiyear low in late 2023. Shares dropped below $50 in October for the first time since the pandemic lows of early 2020. Even though Realty Income stock has bounced from that recent low, it is still trading well below its $64 per share average over the past five years.
NYSE: O
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Now, expectations are that the Fed is done raising rates. That has bond prices rising -- and, thus, yields falling. So, investors are 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 yielded nearly 5% annually, even after the stock price has recovered from its lows.
Management is able to increase the payout because the business continues to grow. Just in the past two months, Realty announced it was acquiring fellow REIT Spirit Realty Capital in an all-stock transaction valued at about $9.3 billion and revealed a new joint venture with Digital Realty Trust to develop new data centers. Realty Income will hold an 80% equity stake in the latter agreement.
Those transactions will add to the diversity of Realty Income's holdings. Earlier this year, the company also announced its first investment in a large Las Vegas casino property. The REIT's consistency of payouts and continued focus on growth make Realty Income a great stock to own in this environment.
Successful through market cycles
Brookfield Infrastructure (BIPC +0.00%) is another. Like Realty Income, it hit a four-year low in October but has recovered strongly from that level. Even considering that recent bounce, shares of the owner and operator of a diversified mix of infrastructure assets have dropped meaningfully in the rising interest rate environment. That's because it relies on borrowing as it invests in assets, including cell towers, energy, transportation, and utilities.
Management has been shrewd at adding value to investments and then selling them to allocate capital to new opportunities for growth. That has led to significant growth in the funds from operations (FFO) it taps to return capital to shareholders. FFO grew 7% year over year in the third quarter and nearly 9% over the past nine months compared to the year-ago period. That followed a 20% annual increase in FFO in 2022.
That helps Brookfield Infrastructure achieve the 5% to 9% annual growth target it has set for distributions to shareholders. Based on its past practices, investors should expect another meaningful dividend raise this coming February.
BIPC Dividend data by YCharts.
Brookfield's use of debt has led to a more than 30% jump in interest expense for the first nine months of 2023 versus 2022. That is partly why the stock has badly trailed the market as a whole this year.
NYSE: BIPC
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But that could also be an additional catalyst to the stock in the coming months and years. Lower interest rates will allow Brookfield to refinance its debt at a lower cost. The company has already been growing its payout to shareholders in the recent rising rate environment. That makes now a good time to buy the stock and participate in the savings to come as the rate cycle reverses direction in the near future.
