Federal Reserve Chairman Jerome Powell is expected to announce the second rate cut in as many months this week. The Fed is looking to fight the impact of the ongoing trade war between the U.S. and China as well as weak global growth that has already resulted in rate cuts in several foreign nations.
While the markets tend to react positively to rate cuts, the underlying implication is that a rate cut would not be necessary if overall economic conditions were entirely favorable.
As rates are cut, the market tends to move higher as investors transfer money out of lower-paying fixed income securities back into securities with more attractive yields.
Dividend stocks obviously benefit, but stocks in any sector that are not negatively sensitive to lower rates will do well.
Here are a few stocks to consider at rates are expected to drop.
Johnson & Johnson (JNJ)
Healthcare giant Johnson & Johnson (JNJ) is a solid buy in falling rates for multiple reasons. Lower rates indicate some underlying economic weakness, and in such landscapes healthcare stocks are seen as defensive plays since demand remains steady regardless of overall economic conditions. Another reason why JNJ is favorable is the company’s capital program. Johnson & Johnson offers a hefty 2.9% dividend yield, and the company has boosted its quarterly distribution each of the last 56 years and should continue to build on that streak moving forward.
Duke Energy (DUK)
Duke Energy (DUK) is an electric company. Utilities are very favorable when the overall economy worsens because utilities are tightly regulated which keeps demand for services very stable. The sector is also known for its high dividend yields, and Duke Energy is currently offering a 4.0% yield with a 12-year streak of increases. The stock is currently trading just shy of its all-time high but the valuation remains attractive at just 18 times future earnings. Analysts forecast profits to rise an at annual rate of 4% over the next five years. The big dividend and the sector’s defensive nature makes DUK a very attractive buy candidate as interest rates continue to fall.
Another sector that is seen as a defensive play in weaker economies is consumer staples. Consumer staples refers to products that keep their demand regardless of economic conditions such as food, beverages, and personal products. Target (TGT) sells a large range of consumer staples and as the company has started to show real progress in growing its e-commerce business and its in-store traffic the stock has roared to life. TGT is up sharply on the year and trading just below its all-time high set the first week of September. The stock’s valuation remains attractive with TGT trading at just 19 times earnings and the stock also offers a solid 2.5% dividend yield with a 51-year streak of dividend increases. Earnings have been on the rise and profits are forecast to rise 9.2% annually over the next five years.
Exxon Mobil (XOM)
Exxon Mobil (XOM) becomes attractive in lower interest rate environments for a couple of reasons. The first being that commodities have an inverse relationship to the dollar. Falling interest rates weaken the dollar which in turn boosts commodities such as oil and gold. Lower rates leads to higher oil prices, which in turn provides a boost to oil and gas companies’ bottom lines. Another reason to like Exxon when rates start to fall is the company’s capital program Exxon currently offers a big 4.7% dividend yield, and the company has boosted its distribution each of the last 36 years, a trend that it not likely to end any time soon. Higher oil prices and a large quarterly dividend will make XOM stock very attractive as the market looks for defensive plays while rates move lower.