With a rising interest-rate environment, obviously Ares can command higher returns for the loans it offers mid-sized firms
All this adds up to the potential for big tailwinds for AON in late 2021 and 2022. And considering the stock has already risen about 38% for the year-to-date amid anticipation for nearly 10% revenue growth this fiscal year, there’s a lot going for Aon right now. The Oracle of Omaha certainly thinks so, with AON added to Warren Buffett’s Berkshire Hathaway portfolio in the first quarter of look at this web site this year.
- Market value: $9.4 billion
- Dividend yield: 8.1%
Ares Capital (ARCC, $) a business development company, or BDC. This kind of stock is a bit like a publicly traded company that operates as a private-equity firm, offering investors a way to pool their resources and take advantage of targeted opportunities that ARCC thinks will deliver outsized returns.
Specifically, Ares Capital engages in acquisitions, recapitalizations, restructurings and “rescue financing” of mid-sized companies that typically are between $20 million and $200 million in market value.
In other words, these are Goldilocks companies that are neither too small to be meaningless nor too big to be able to access capital markets in a way that an entrenched blue-chip stock could.
Particularly interesting is the so-called “unitranche” structured investments where Ares goes all-in to be the first and only lender, giving it a powerful seat at the table when it comes to negotiating with management or ensuring its loans are paid in the event of a default.
Plus, the company offers a best-in-class quarterly dividend of roughly 8.0% after a recent bump to 41 cents a share – sign that this company is dedicated to sharing its success with its public stakeholders.
Adding it all up, it’s easy to see why ARCC is one of the best stocks for rising interest rates.
Capital One Financial
- Market value: $74.3 billion
- Dividend yield: 1.4%
Diversified financial firm Capital One Financial (COF, $) may be best known for its “What’s In Your Wallet?” paign for credit cards. However, this nearly $75 billion stock is much more than that, offering consumer and commercial banking services through roughly 800 branches nationwide.
In fact, thanks to this ever-growing portfolio of loans outside of its credit card business, COF enjoys net interest income of more than $5.5 billion every quarter going back to late 2016!
What’s more, its net interest margin – a measure of the difference between interest COF pays out and the interest payments lenders pay back into the company – has been hovering around 6% in 2021. This despite the fact that rates haven’t been able to consistently move higher yet this year.
Net interest margin is one of the big tailwinds provided to financial firms in a rising interest-rate environment, as they can gain better returns on their balance of cash while also increasing rates on consumers and businesses that come in for loans.
Capital One’s diversified lending portfolio and strong history of success makes this company a prime target for investors looking at the best stocks for rising interest rates.
And considering COF stock is already up nearly 70% in 2021, investors can have confidence that this is a stock with the wind at its back as we close out the year and look ahead to 2022.
Discover Financial Services
- Market value: $38.0 billion
- Dividend yield: 1.6%
Discover Financial Services (DFS, $) was thought of as an also-ran in the credit-card game by some when it was founded in the 1960s. But the company is now a nearly $40 billion consumer lending powerhouse that stands shoulder to shoulder with peers like Visa (V) and American Express (AXP).