2 stocks that will soar when the Federal Reserve cuts interest rates in 2024

No one knows when the Fed will begin its next rate-cutting cycle. But everyone knows it’s coming. As inflation moves closer to more normalized levels, the Fed will need to begin cutting interest rates.

For investors, this means looking ahead to see which sectors and stocks will benefit the most. And as interest rate cuts become a reality, it would be wise to own the name before the stock is bid higher. Here are two names that should benefit investors and provide a reliable source of income.

Savings won again.

Many people own real estate investment trusts (REITs) as a source of income. Over the past decade, most REITs have paid dividend yields higher than those found in savings accounts or bonds. But with interest rates soaring over the past two years, these investments are not a wise income replacement for savings accounts.

This is what caused the stock. real estate income (o -0.64%) It plummeted to multi-year lows at the end of 2023. In October, the stock fell below $50 for the first time since pandemic lows in early 2020. Despite Realty Income stock rebounding from recent lows, it’s still trading below $64 per share. Average over the past 5 years.

The Fed is now expected to complete its interest rate hike. This causes bond prices to rise and, consequently, yields to fall. Therefore, investors are now looking for better sources of income. Realty Income fits this bill and its underlying fundamentals are attractive.

In December, Realty Income announced its 123rd dividend increase since 1994. The monthly dividend has returned nearly 5% annually, even after the stock price recovered from recent lows.

As the business continues to grow, management can increase the payout. Over the past two months, Realty has announced acquisitions of fellow REITs. Spirit Real Estate Capital Completed an all-stock transaction worth approximately $9.3 billion, Digital Real Estate Trust Develop new data centers. Realty Income will hold an 80% stake in the latter deal.

These transactions will increase the diversity of Realty Income’s holdings. Earlier this year, the company also announced its first investment in a large casino property in Las Vegas. The REIT’s consistent payouts and focus on continued growth make Realty Income a great stock to own in this environment.

Succeed through market cycles

Brookfield Infrastructure (BIPC -0.33%) That’s another thing. Like Realty Income, it hit a four-year low in October but has recovered significantly from that level. Even taking into account the recent rebound, the stakes of owners and operators of a diverse mix of infrastructure assets have declined meaningfully in a rising interest rate environment. This is because they rely on borrowing while investing in assets such as base stations, energy, transportation, and utilities.

Management was astute at adding value to investments and then selling them to allocate capital to new opportunities for growth. This has resulted in a significant increase in funds from operations (FFO) utilized to return capital to shareholders. FFO grew 7% year-over-year in the third quarter, and has grown nearly 9% year-over-year over the past nine months. This follows a 20% annual increase in FFO in 2022.

This will help Brookfield Infrastructure achieve the 5-9% annual growth target it has set for distributions to shareholders. Based on past practice, investors should expect another meaningful dividend increase this February.

BIPC dividend data from YCharts.

Brookfield’s use of debt caused interest expenses to surge more than 30% in the first nine months of 2023 compared to 2022. This is partly why stocks have lagged the broader market so badly this year.

However, this could also be an additional catalyst for stocks in the coming months and years. Low interest rates allow Brookfield to refinance its debt at a lower cost. The company has already been increasing its dividends to shareholders in the recent rising interest rate environment. This is a good time to buy stocks and participate in savings as interest rate cycles change direction in the near future.