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Best Shares to Buy Before Interest Rates Start Climbing

Billy Toh

February 16, 2022

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The market is expecting the US Federal Reserve (Fed) to kick off its tightening cycle in March with its first interest rate hike since before the onset of the COVID-19 pandemic.

This is happening amid inflation in the US that has hit its highest level in 40 years recently, with prices rising by 7.5% from a year ago.

So, how do we position our investment portfolio before the interest rate hikes?

The first thing to take note of is that the increase in interest rates will lead to a progressive rise in borrowing costs.

This will benefit the financial sector since higher borrowing costs translates into greater revenue.

Meanwhile, there might not be too much incentive for savers to keep their money in the bank because the value of their savings will be eroded by the inflationary environment.

You should also be aware that high interest rate periods typically boost the property, industrials and consumer discretionary sectors.

With this in mind, here are three stocks that I think investors should buy before the interest rate hikes start in March.

1) Altria Group

Altria Group Inc (NYSE: MO) is a tobacco manufacturer and sells cigarettes, oral tobacco products and wine in the US.

Among some of the most recognised brands under Altria include Marlboro and Black & Mild.

It has also expanded into the smokeless category with brand names such as Copenhagen, Skoal, Red Seal and Husky, to cater for the increasingly health-conscious consumer.

The company offers an attractive dividend yield of 7.1% at its current share price of US$50.32 while its valuation is also fair with a price-earnings ratio (PE) of 10.8 times.

The company has a strong dividend track record with an 80% payout ratio and a five-year average dividend yield of around 6.0%.

Aside from that, Altria delivered strong earnings in the fourth quarter of fiscal year (FY) 2021 and that helped to generate solid full-year earnings per share (EPS) growth of 5.7%.

The earnings results showed that the company’s core cigarette business has remained stable despite the evolving dynamics in the tobacco industry.

It is no wonder that Altria’s share price has gained momentum since the rotation into value began (see below).

2) 3M

3M Company (NYSE: MMM) is a dividend-paying large-cap stock in the industrials sector that will benefit from the interest rate hike cycle.

At its current share price of US$157.34, it offers an attractive dividend yield of 3.8% and has a five-year average dividend yield of around 3.2%.

Aside from that, 3M has a diversified business model, which helped to maintain its earnings over the last two years despite the COVID-19 pandemic’s impact. This is mainly supported by the company’s healthcare business.

3M develops, manufactures and markets various products globally and operates four business segments, namely – safety and industrial, transportation and electronics, healthcare and consumer.

During the company’s recent investor event, 3M issued FY2022 guidance for sales growth of 1% to 4%, in line with expectations. The outlook anticipates a decline in COVID-related face mask sales.

3) Charles Schwab

Given that banks and retail brokers are likely to benefit from the rising interest rate environment, I think that investors should consider adding The Charles Schwab Corporation (NYSE: SCHW) into their portfolio.

Charles Schwab is a leading retail brokerage and financial services firm. It has experienced robust growth over the years and is now the industry giant since the acquisition of peer TD Ameritrade.

Synergies from the acquisition will boost margins for the combined entity once the integration of TD Ameritrade is complete.

Charles Schwab derives revenues from two primary sources, interest income and non-interest income (NII).

For interest income, the company generates interest revenue by investing its clients’ account cash balances in fixed income securities but paying clients less interest than it receives.

As Charles Schwab’s NII is highly sensitive to short-term treasury rates, the interest rate hike cycle will boost its NII going forward.

Aside from that, Charles Schwab offers a dividend yield of 1.0%. While it is rather low, it comes with a safe dividend payout ratio of just 23%.

Buy into stocks benefitting from rising rates

While the recent volatile stock market has led to some sell holdings in the stock market, investors can position themselves in stocks that could benefit from the expected Fed rate hike in March.

It is worth noting that the act of hiking interest rates also indicates an improving economy.

With Altria, 3M and Charles Schwab, investors are buying into companies that offer attractive dividend yields and have business models that will gain from the rising interest rate environment.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.