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3 Income Investment Stock Picks for Rising Interest Rates

With the Fed Funds rate now hovering between 3.75% and 4%, and more rates hikes on the horizon, here are 3 stocks for income-focussed investors that are likely to do well in a high interest rate environment

David Garner
David Garner
Published On: December 1st, 2022

3 Income Paying Stocks for Rising Interest Rates

Unless you’ve been living under a rock, you’ll already know that the Federal Reserve has been aggressively raising interest rates in their battle against the rapidly rising cost of living.

It’s economics 101… when inflation starts to climb rapidly, one of the most effective tools policymakers have at their disposal is the manipulation of the cost of money.

But with the Fed Funds rate already hovering around 3.75% to 4%, and inflation not yet tamed,  it looks very much like there will be more rate hikes to come.

While broadly speaking, higher interest rates are bad for the stock market (because it makes the cost of borrowing money more expensive), that isn’t true for all stocks. In fact, there are some stocks out there that will actually benefit from rising interest rates.

Here are 3 stock picks for income-focussed investors that are geared to do well in a rising-rate environment.

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JP Morgan Chase (JPM)

Like a huge financial octopus, with tentacles reaching every part of the financial services economy, JPMorgan Chase is now worth some $386 billion.

With annual sales of almost $130 million, the company grew its quarterly revenue by 10% to almost $40 billion in the penultimate quarter of this year, outperforming analysts’ earnings-per-share predictions by some margin.

Higher interest rates bode well for entities like JPMorgan that offer large private money lending and corporate borrowing, many of which track variable interest rates.

As such, JPMorgan Chase expects net interest income on its $1 trillion loan portfolio to reach $66 billion by the end of this the year. If that happens, which it likely will (or close to it), it will mark a huge 25% improvement over 2021.

With stable and consistent business growth expected to continue, as well as an ongoing share buyback program bolstering value, Analysts and commentators are predicting that earnings per share for JPMorgan Chase are likely to continue to grow for the next five years at up to 6% per year.

This stock is also a potentially great buy for investors looking specifically for income. With a current yield of 3.0%, the company has raised its dividend every year for more than a decade. Indicating a fairly safe dividend with more room for growth when the wider economic landscape improves.

Related: 24 Investments That Pay Monthly Income Right Now

Bank of New York Mellon (BK)

A long-term favourite of legendary investor, Warren Buffet, Bank of New York Mellon is another financial services behemoth that might serve income investors well while interest rates are on the up.

BNY Mellon is about 10 times smaller than JPMorgan Chase with a market capitalization of almost $35 billion, and annual revenue of $16 billion, but still has around $1.78 trillion in clients assets under management.

Like JPMorgan Chase, BNY Mellon has performed particularly well of late. Revenues for the bank are up almost 6% year on year, and adjusted earnings per share are also up a whopping 11% to $1.21. Overall, the stock has outperformed analysts’ expectations by some margin.

The bank has interests is a range of interest bearing assets from corporate debt to real estate debt such as performing mortgage notes. Again, its large loan portfolio is likely to serve the company well while interest rates are expanding. Net interest revenue exploded to almost $1 billion in Q3, an enormous 44% higher than the same period in 2021.

Analysts predict that earnings per share are likely to grow by 6% annually for the next five years, driven by a combination of growth in interest income from its growing lending business, as well as growth in fee revenue through expansion of assets under management.

For income focused investors, the company has increased its dividend payment for 12 years straight and offers a healthy 3.5% yield today.

It’s also a safe dividend. Like its banking peers, BNY Mellon pays out only about one third of its earnings, pretty much ensuring further dividend growth for the foreseeable future at least.

With a diversified revenue stream from fees, interest and other income, the company is not entirely reliant on income from its lending business, helping it to perform well, while other lending-focused banks may struggle during periods of recession.

Related: All 50+ Stocks Paying Monthly Dividends

Ally Financial (ALLY)

Another financial services company to watch during this period of rising interest rates is Ally Financial.

With a market cap of $7.5 billion, the company services the automotive industry with auto loans, commercial insurance, credit lines, and other corporate finance products.

While overall revenues are growing, with 2% growth pushing income to $2 billion, earnings per share dropped 48% from $2.16 to $1.12. Unsurprising as the company allocated significantly more capital for credit losses ($438 million from $76), resulting in lower reserves.

Ally wrote $12 billion is new auto loans for consumers during Q3, and deposits also grew 2.5% to $143 billion.

As with the two banks mentioned earlier in this article, Ally Financial benefits from rising interest rates. Higher rates drove a 15-basis point improvement in the company’s net interest margin to 3.81 during the period.

Analysts are predicting earnings per share growth of 1% per year for the next five years. The company has proven it is capable of consistent growth through varying economic landscapes, with more loan originations, higher insurance premiums, and growth in its Ally Invest and Ally Home divisions.

This stock could be a healthy choice for income investors, too. With a yield of 4.7% – almost three times the S&P500 average – Ally investors have enjoyed dividend growth for 6 years straight, with most pundits expecting that to continue.

So, there you have it, 3 stocks to align your portfolio with an economic environment defined in no small part by rising interest rates.

And don’t forget, if building monthly income from investments is your focus, make sure to sign up to our Priority Investor email list, and join 5,000+ investors in receiving new monthly income-generating lending investments in your inbox every Thursday.

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