When interest rates rise, the stock market tends to decline. The reason is that rising interest rates are a sign that central banks are trying to cool off an overheated economy, usually due to inflation. IN that environment, fixed-income investments such as bonds and cash, which carry lower risk than equities, give investors a larger reward for playing it safe.
Playing it safe makes sense if you're at a stage where wealth preservation is your primary objective. However, if you're still growing your portfolio, the risk of playing it too cautiously may cause you to fall behind on your larger goals.
The key could be a diversified portfolio. And that means continuing to invest in stocks selectively. When interest rates rise, that selectivity means shifting your focus away from growth stocks to value and income stocks.
In some cases, this means focusing on sectors of the economy that benefit from rising interest rates, which generally means financial stocks such as banks and insurance companies. It can also mean investing in defensive stocks – defined as those of companies that offer products and/or services that will be in demand regardless of rising.
Quick Links
- Exxon Mobil
- General Mills
- Procter & Gamble
- Costco
- Travelers Companies
- Cardinal Health
- Extra Space Storage
#1 - Exxon Mobil (NYSE:XOM)
The first sector that you may consider investing in is the energy sector. And if you’re looking to invest in oil stocks, Exxon Mobil (NYSE: XOM) is an attractive choice.
Theoretically, rising interest rates should cause energy prices to come down as demand weakens. And as oil prices come down, there’s no profit in drilling.
That’s true at the beginning of a downturn. But history shows that oil prices usually find a floor relatively quickly. That’s because the economy doesn’t move without oil and oil derivatives. And that means that oil prices usually are among the first to come back when the economy starts to recover regardless of what’s happening with interest rates.
That’s one reason to keep XOM stock in your portfolio. Another is that the company is well-positioned to be profitable even if oil prices are in the $60-dollar range. That makes Exxon Mobil’s dividend, which yields 3.24% at this time, extremely safe. And since the company has increased the dividend for 40 consecutive years, investors are likely to benefit from higher dividend payments in the future.
About Exxon Mobil
Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas in the United States and internationally. It operates through Upstream, Energy Products, Chemical Products, and Specialty Products segments. The Upstream segment explores for and produces crude oil and natural gas.
Read More - Current Price
- $117.33
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $134.78 (14.9% Upside)
#2 - General Mills (NYSE:GIS)
When you’re looking to find a sector that can help you beat higher interest rates, consumer staples is a good place to start. And General Mills, Inc. (NYSE: GIS) is a treasure in plain sight. In 2022, the S&P 500 suffered its worst year since 2008, but GIS stock climbed 24%. In fact, the stock has climbed 55% in the last five years. And that doesn’t include the dividend which currently yields about 2.75%.
The company’s stable of comfort foods includes some of the most recognized cereal brands. And with its acquisition of Blue Buffalo in 2018, the company is becoming a significant player in the growing pet food sector.
General Mills has a profit margin of 15.02% which is nearly triple the sector average. That shows investors that the company has pricing power. This is reflected in earnings have come in higher than analysts’ expectations in the four quarters ending in December 2022.
About General Mills
General Mills, Inc manufactures and markets branded consumer foods worldwide. The company operates through four segments: North America Retail; International; Pet; and North America Foodservice. It offers grain, ready-to-eat cereals, refrigerated yogurt, soup, meal kits, refrigerated and frozen dough products, dessert and baking mixes, bakery flour, frozen pizza and pizza snacks, snack bars, fruit and salty snacks, ice cream and frozen desserts, nutrition bars, and savory snacks, as well as various organic products, including frozen and shelf-stable vegetables.
Read More - Current Price
- $66.32
- Consensus Rating
- Hold
- Ratings Breakdown
- 2 Buy Ratings, 14 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $68.82 (3.8% Upside)
#3 - Procter & Gamble (NYSE:PG)
Sticking with the consumer staples sector, The Procter & Gamble Co. (NYSE: PG) is an evergreen choice. Consumer staples are not exclusively about food. And P&G is one of the most prominent names for beauty, grooming, healthcare, baby and feminine care products. Your home probably includes one or more of the company’s products at any given time.
In 2022, this model played out very well for investors. Revenue was up sequentially in each of the four quarters (which spanned two fiscal years). The company also beat on earnings in three of the four quarters. They weren’t large beats, but when many analysts called for an earnings recession, it was a welcome sight.
The stock fell nearly 10% in 2022, but that outpaced the broader market. And investors were still rewarded with a rock-solid dividend. Procter & Gamble is a dividend king has increased its dividend in each of the last 67 consecutive years.
About Procter & Gamble
The Procter & Gamble Company provides branded consumer packaged goods worldwide. It operates through five segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. The Beauty segment offers conditioners, shampoos, styling aids, and treatments under the Head & Shoulders, Herbal Essences, Pantene, and Rejoice brands; and antiperspirants and deodorants, personal cleansing, and skin care products under the Olay, Old Spice, Safeguard, Secret, and SK-II brands.
Read More - Current Price
- $169.15
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 15 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $174.29 (3.0% Upside)
#4 - Costco (NASDAQ:COST)
A different way to play the likely growth in consumer staples is to invest in the companies where consumers are likely to shop for those staples. That makes Costco Wholesale Corporation (NASDAQ: COST) a logical choice.
The company benefits from a subscription model. Once consumers have paid their annual fee, they’re likely to prioritize shopping at Costco for bulk purchases of their staple items. While they’re there, those same consumers are likely to pick up a few discretionary items as well. And Costco has a popular line of house brands that are convenient for consumers who look to trade down when interest rates make the price of borrowing high.
Costco is also beefing up its digital game. This was a lifeline during the pandemic, and it will help the company keep up in an omnichannel world.
As of this writing, COST stock is down about 7% in the last 12 months. However, the stock is a juggernaut having gained over 39% in the last five years.
About Costco Wholesale
Costco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. The company offers branded and private-label products in a range of merchandise categories.
Read More - Current Price
- $817.60
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 20 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $799.33 (2.2% Downside)
#5 - Travelers Companies (NYSE:TRV)
The financial sector is another area where investors can look for stocks to buy in a rising interest rate environment. That can bring to mind banks such as JPMorgan Chase & Co. (NYSE: JPM), but you can also look at the insurance sector and, specifically, the Travelers Companies, Inc. (NYSE: TRV).
Insurance companies are all about risk management. That means most of their underlying investments are in the relative security of the bond market. When interest rates are low, these investments underperform stocks. But the reverse can be the case when interest rates are rising. Plus, insurance is a sticky part of an individual or household budget. Put, premiums have to be paid.
In 2022, TRV stock went up 5% while the broader market was having its worst year since 2008. And over the last five years, the stock has gained over 27%. That doesn’t include the company’s dividend, which has a respectable yield of 2.07% and has increased in each of the last 20 consecutive years.
About Travelers Companies
The Travelers Companies, Inc, through its subsidiaries, provides a range of commercial and personal property, and casualty insurance products and services to businesses, government units, associations, and individuals in the United States and internationally. The company operates through three segments: Business Insurance, Bond & Specialty Insurance, and Personal Insurance.
Read More - Current Price
- $213.85
- Consensus Rating
- Hold
- Ratings Breakdown
- 4 Buy Ratings, 13 Hold Ratings, 4 Sell Ratings.
- Consensus Price Target
- $220.94 (3.3% Upside)
#6 - Cardinal Health (NYSE:CAH)
The healthcare sector is another logical sector for investors to hide out in when interest rates are rising. Individuals will prioritize health care right along with consumer staples. Cardinal Health, Inc. (NYSE: CAH) has an expansive mission as “a distributor of pharmaceuticals, a global manufacturer and distributor of medical and laboratory products, and a provider of performance and data solutions for healthcare facilities.”
That simply means the company is involved at every stage of a patient and provider’s healthcare journey. And the company is showing some impressive fundamentals. At a time when earnings are expected to decline, Cardinal has beaten earnings expectations in the last two quarters and is expecting to post higher full-year earnings in 2023.
That corresponds to the 39% growth in the CAH stock price. The company is also a dividend aristocrat that pays a respectable dividend yield of 2.07% and has been increasing its dividend for the last 37 years. Cardinal Health sports 88% institutional ownership which helps make the stock less volatile.
About Cardinal Health
Cardinal Health, Inc operates as a healthcare services and products company in the United States, Canada, Europe, Asia, and internationally. It provides customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices, and patients in the home.
Read More - Current Price
- $98.37
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $109.67 (11.5% Upside)
#7 - Extra Space Storage (NYSE:EXR)
The last stock on this list is Extra Space Storage, Inc. (NYSE: EXR). The company operates as a real estate investment trust (REIT) and has been recognized as a best-in-class company and a technology leader withing the sector.
Extra Space Storage is the second-largest owner and operator of self-storage properties in the United States. The company runs over 2,000 self-storage properties which accounts for about 164 million square feet of rentable storage space throughout the United States.
Storage units aren’t the sexiest business, but they’re reliable generators of revenue no matter what’s happening in the economy. That’s evident in the fact that the percentage of U.S. households using public storage as a percentage of overall households has more than doubled since the year 2000.
And with a profit margin of around 50% as of this writing, there’s ample room for the company to return some cash to shareholders. In fact, one of the benefits to investing in a REIT is that the business model requires them to return at least 90% of their earnings to shareholders in the form of a dividend.
About Extra Space Storage
Extra Space Storage Inc, headquartered in Salt Lake City, Utah, is a self-administered and self-managed REIT and a member of the S&P 500. As of December 31, 2023, the Company owned and/or operated 3,714 self-storage stores in 42 states and Washington, DC The Company's stores comprise approximately 2.6 million units and approximately 283.0 million square feet of rentable space operating under the Extra Space, Life Storage and Storage Express brands.
Read More - Current Price
- $164.61
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $157.67 (4.2% Downside)
Rising interest rates are usually an early predictor of a bear market and/or a recession. During these times, it can be tempting to avoid stocks. It's never enjoyable to see our portfolio drop without knowing when, or if, it will ever get back to where it was.
But it's during those times when you can look at history as a guide. When it comes to the stock market, history is undefeated. Markets have an upward bias. And when you consider that markets are always forward looking, stocks will tend to climb when the economy still appears to be stalled out.
However, if picking individual stocks in a rising interest rate environment feels like a daunting task, you can still maintain exposure to equities with a passive investment strategy. This can include owning exchange-traded funds (ETFs). These allow you to get exposure to a basket of stocks that provide instant diversification. To minimize your risk even more, you can choose to invest in an index fund that tracks a specific part of the market (e.g., the S&P 500).
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