published 24 January 2023
The Federal Reserve raised its benchmark interest rate seven times last year, sending the effective federal funds rate above 4% for the first time since before the financial crisis of 2008. That has left investors scrambling to scrape up the best stocks for rising interest rates.
And it’s likely the central bank is not done lifting rates just yet. The market is currently pricing in a 25 basis point rate hike (0.25%) at the Fed’s early February meeting, and another one at its March gathering, according to CME Group (opens in new tab).
While there is undoubtedly some pain that comes from these aggressive rate hikes, including increased borrowing costs for consumers and businesses, there are some stocks that actually benefit from higher interest rates. Furthermore, there are other investments that appear resilient and reasonably insulated from any rate-related disruptions on Wall Street.
With this in mind, here are nine of the best stocks for rising interest rates. The potential options featured here offer different ways to sidestep the challenges of higher interest rates. They can also prepare investors for the prospect of additional increases if and when they occur in 2023.
Data is as of Jan. 23. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
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Fair Isaac Sector: TechnologyMarket value: $16.2 billionDividend yield: N/AYou may recognize Fair Isaac (FICO (opens in new tab), $649.95) from its ticker symbol, which is the shorthand for consumer credit scores nationwide. The firm was founded back in the 1950s as a data and analytics company, and eventually developed a way to compile credit histories and “score” the spending and borrowing history of consumers and businesses. Its now-popular FICO scores help determine not just whether someone qualifies for a credit card or a mortgage or auto loan, but how much interest they will pay.
Needless to say, FICO is one of the best stocks for rising interest rates because, in this type of environment, there is more attention paid to these credit scores. What used to be a modest increase in borrowing costs for less-than-perfect borrowers can now become an onerous burden, and parties on both sides of loans are looking to assess and manage their credit risks. That’s ultimately a very good thing for Fair Isaac.
It’s also worth noting that while one division of FICO is focused on this scoring business, it also provides other analytics and decision-management solutions for businesses to help them run more efficiently. As one example, in December, one of its AI-driven tools won an industry award (opens in new tab) for its ability to detect payments fraud.
Profits and sales for FICO are both marching steadily higher. Plus, shares are up nearly 60% in the past three months after a blowout earnings report in November and strong forward guidance that included a double-digit prediction for earnings growth. That strong performance was followed by Buy or equivalent ratings from a host of Wall Street firms, including Goldman Sachs, Barclays and Jefferies, hinting of even better days ahead in 2023.
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First Solar Sector: TechnologyMarket value: $18.8 billionDividend yield: N/AOne of the largest players in the alternative energy space, First Solar (FSLR (opens in new tab), $176.21) is a riskier play than some of the other stocks on this list, but still looks like it has upside in 2023. And most importantly, the value proposition of FSLR stock is largely independent of the interest-rate environment.
As a major provider of photovoltaic solar energy solutions to the U.S., Europe and Asia, First Solar is at the center of the clean energy revolution and the global response to climate change. In the short term, FSLR also is making waves as a potential shock absorber for the recent energy supply disruptions that have gripped Europe in the wake of Russia’s aggression in Ukraine.
Historically, solar stocks have experienced plenty of ups and downs. That’s not just because of the challenge with demand and adoption trends, but also because of more practical concerns like supply-chain disruptions and input costs that are important for any manufacturer. But with shares of FSLR stock doubling over the last 12 months, including a run of more than 40% in the last three months alone, it’s hard to argue that the sun isn’t shining on the sector right now.
In January, positive analyst reports dropped from Susquehanna, Deutsche Bank and KeyBanc, indicating Wall Street maintains its optimism for the foreseeable future. And speaking of looking ahead, fiscal 2023 forecasts for this solar giant include nearly 30% revenue expansion on the year. For investors worried about how to navigate rising rates and related challenges in the stock market, FSLR may be one of the best growth stocks to consider.
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Affiliated Managers Group Sector: Financial servicesMarket value: $6.2 billionDividend yield: 0.02%As you may have been able to guess by the name, Affiliated Managers Group (AMG (opens in new tab), $165.88) is a group of affiliated asset managers that offer access to mutual funds, hedge funds, institutional services and white-glove financial advice to high-net-worth individuals.
At present, AMG is one of the top 10 publicly traded asset managers with a massive portfolio of $650 billion collectively under management. Its specialty is to identify and partner with investment firms around the world specializing in actively managed investment strategies for aggressive, ultra-rich investors, rather than participate in the “race to the bottom” on low-cost index funds built for hands-off retirees.
What also makes AMG interesting is that it is truly a network of affiliates. Its suite of 14 different “boutiques” include offices with expertise in different areas, independent staff and strong brands in their local markets. This allows it to separate itself from the one-size-fits-all approach that many mega-managers like Vanguard or Fidelity deploy.
And aside from the competitive advantage of its specific operations, rising interest rates generally means rising returns on firms sitting on a lot of capital. That naturally makes AMG one of the best stocks for rising interest rates. Not surprisingly, shares have rallied 40% or so in the last six months, versus a 1.5% return for the S&P 500.
Analysts are upbeat toward Affiliated Managers Group too. Jefferies recently tapped AMG as a top pick among asset managers, saying “2023 will drive increased demand to fixed-income and liquid alternatives.” They’re hardly alone in their bullish outlook. The average rating among the eight analysts covering the stock tracked by S&P Global Market Intelligence is a Buy.
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McKesson Sector: HealthcareMarket value: $53.2 billionDividend yield: 0.6%McKesson (MCK (opens in new tab), $375.03) provides healthcare services worldwide, including technology and financial solutions to medical facilities, as well as pharmaceutical distribution and wholesale medical supply sales.
This diversified operation has helped MCK stock largely sidestep any of the broader disruptions we’ve seen in the economy related to commodity inflation and rising interest rates. The services it provides, including software for pharmacies to help manage prescriptions and the regular delivery of gloves, bandages and other staples to medical offices, have incredibly reliable sales and profits.
In addition, this reliability has helped MCK steadily set aside resources to return capital to shareholders. That includes a new $4 billion buyback plan that began in 2022, as well as a dividend that has more than doubled in the last 10 years from 20 cents per share in mid-2013 to 54 cents per share after its latest 15% boost to payouts last August.
There’s a lot of uncertainty in the global economy right now, but healthcare generally is a recession-proof sector. And with the solid operations of a company like McKesson, investors looking for the best stocks for rising interest rates can have confidence that their money will be safe regardless of the ups and downs in the economy.
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Lamb Weston Holdings Sector: Consumer staplesMarket value: $13.8 billionDividend yield: 1.2%Lamb Weston Holdings (LW (opens in new tab), $96.13) probably isn’t a household name for most Americans. It’s based in Idaho, and produces and distributes frozen potato products, vegetables and dairy goods worldwide.
The largest Lamb Weston customer is fast food giant McDonald’s (MCD (opens in new tab)), which accounted for about 10% of net sales in fiscal 2022, which ended May 29. It also provides other foodservice businesses, as well as “private label” frozen foods sold at grocery stores and other retailers.
Now, this is not a particularly dynamic business. Unless we see some magical study that French fries are suddenly healthy for you, it’s unlikely we’ll see a rapid boom in LW sales anytime soon. However, this kind of boring “risk-off” stock has been decidedly in favor lately as many investors are looking to insulate themselves from volatility in the equities market generally and the impact of rising rates in particular.
As proof of how LW can hang tough, the consumer staples stock is up an amazing 48% in the last 12 months, even as the rest of Wall Street has struggled. That’s in part because of what is expected to be a nearly 20% increase in revenue this fiscal year as the foodservice business normalizes after pandemic-related disruptions. However, it’s also because investors know they can rely on this profitable operation regardless of any short-term pain for the economy in 2023, which makes LW one of the best stocks for rising interest rates.
In January, JPMorgan maintained its Overweight (Buy) rating on the stock as a vote of confidence for its future performance.
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PennyMac Financial Services Sector: Financial servicesMarket value: $3.3 billionDividend yield: 1.2%PennyMac Financial Services (PFSI (opens in new tab), $65.58) is a mortgage lender that originates and services home loans to Americans. And as interest rates rise, the firm can command bigger margins from homebuyers as a result.
There is a bit of risk here, to be sure. If rates get too high, the cost of borrowing can hold back overall lending activity. Additionally, any broader economic downturn that weighs on the housing market could impact demand. In fact, revenue is predicted to roll back in the year ahead thanks to moderation in housing.
However, it’s worth noting that Wells Fargo upgraded PFSI to Overweight (Buy) in December, citing the company’s “strong franchise” and expectations that “the worst is behind the industry.” Plus, shares have surged nearly 70% from their 2022 lows now that this “new normal” is priced in.
On top of this core mortgage business, PFSI also has an investment management segment, which will also see a tailwind from rising interest rates.
Many economists believe that the nation’s overall housing supply remains limited so prices for real estate will stay elevated as the sector is focused on quality over quantity. That could bode well for PennyMac as it may not be swamped with buyers, but it can depend on high-quality and high-margin loans as rates stay high.
When you add all of that up, it’s easy to see why PFSI is one of the best stocks for rising interest rates.
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Principal Financial Group Sector: Financial servicesMarket value: $21.9 billionDividend yield: 2.9%Insurance and investment management giant Principal Financial Group (PFG (opens in new tab), $89.34) is another example of a big financial firm being one of the best stocks for rising interest rates. But PFG is separate from similar names on this list because it has bigger scale and more stable operations.
To begin with, its retirement and pension solutions rely on the management of fixed-benefit pension plans worldwide and employer 401(k) plans – a very reliable business line when compared with the ebb and flow of more active investment management strategies. Furthermore, its insurance solutions segments, which include a brisk life insurance business, are the definition of a steady income stream as Principal cashes in the premiums paid by policyholders each month.
What’s more, PFG is getting even bigger to take advantage of the current environment. Recently, it closed a deal to take over millions of U.S. clients from the retirement services arm of Wells Fargo (WFC (opens in new tab)). Due in part to that roll-up, Principal’s financial services arm had north of $600 billion in assets under management at the end of the third quarter, and an even more impressive $1.4 trillion in assets under administration when you count the institutional money of clients that it services on their behalf.
Shares are up more than 24% in the last year, while the S&P 500 is down nearly 9%. That’s in large part because rising rates are sure to lift a company like this with a huge stockpile of cash.
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Enbridge Sector: EnergyMarket value: $84.8 billionDividend yield: 6.2%The largest name on this list of the best stocks for rising interest rates – and by a fairly significant margin – is Enbridge (ENB (opens in new tab), $41.88). Though a mainstay of the oil and gas industry, it’s important to point out that this isn’t an explorer drilling for crude oil. Rather ENB is an energy infrastructure MLP, or master limited partnership.
This is a special class of corporation structured as a partnership in part to help finance the capital-intensive nature of building pipelines, terminals and storage facilities.
This business model makes the company less volatile than many other energy stocks that are sensitive to market prices for petroleum products. Case in point: While some drillers soared in 2022, ENB has been left in the dust with a mostly flat calendar-year return.
But that lack of volatility cuts both ways, and the appeal of this stock to many investors is, in fact, this slow-and-steady performance. Stability, not rapid share price appreciation, is the name of the game.
In recent years, Enbridge has tightened its grip through acquisitions of firms like Spectra Energy, which has only widened its moat. That has helped to fuel its current dividend yield of 6.2%, and continue 25 years of consecutive annual dividend growth.
If you want to make a swing trade on oil prices, ENB is not for you. But if you’re looking to invest in a low-risk, income-oriented fashion across 2023, then this energy infrastructure player might fit in your portfolio.
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Hanesbrands Sector: Consumer discretionaryMarket value: $2.9 billionDividend yield: 7.5%There’s been plenty of talk about whether we will see a “risk-off” environment that favors defensive stocks in 2023 or whether we’ll see a return to “risk on” and growth-oriented investments. Hanesbrands (HBI (opens in new tab), $8.26) splits the difference with a little bit of both.
Hanes is a consumer apparel company that makes its namesake undergarments, as well as Playtex and Maidenform bras and Champion athletic wear. While some consumer stocks have struggled to keep costs down or to connect with shoppers lately, Hanesbrands just saw a big jump in shares after announcing it will top revenue forecasts in its upcoming fourth-quarter and full-year earnings report. On top of that, inventories are actually tracking a bit below the prior year’s level to prove that Hanes is being responsible with its operations and isn’t overproducing out of unwarranted optimism.
Part of the reason for this success is HBI’s “Full Potential” growth plan, unveiled by management in 2021. The program looks to elevate the Champion brand globally as part of a boom in athletic wear, as well as to improve internal operations through supply-chain optimization.
Shares are down over the last 12 months, but this is a stock with real built-in value via its steady undergarments business and the potential for upside as it builds on recent improvements. On top of that, HBI is one of the best dividend stocks, and its current quarterly payout of 15 cents a share each quarter works out to a jaw-dropping yield of 7.5%. What’s more, that payout is less than two-thirds of total earnings and could mean more dividend increases down the road.
In a rising interest-rate environment, HBI is a great example of a stock with good value and decent growth prospects in an otherwise uncertain stock market.
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