The Federal Reserve has officially started its rate-cutting cycle. On September 18, the central bank slashed the key funds rate by half a percent, a more aggressive move than anticipated. This decision will relieve consumer pressure, potentially lowering credit card and mortgage rates.
While most experts had predicted a rate cut, the consensus expected a more modest quarter-percent reduction. The more significant cut indicates that the Fed is optimistic about controlling inflation. The rate of price increases fell to 2.5% in August, and the Fed believes it will soon hit the 2% target.
With this shift in Fed policy, investors are asking, what’s next? Wells Fargo analyst Donald Fandetti recommends considering REITs and specialty finance sectors, which historically perform well in rate-cutting cycles while providing high dividend yields. Fandetti specifically recommends two stocks paying dividend yields over 12%: Annaly Capital Management and AGNC Investment.
Both are rated as Strong Buys by the analyst consensus.
High-dividend buys after Fed cut
Annaly Capital Management is a REIT focused on residential real estate and mortgage-backed securities.
The company has a $75 billion portfolio and follows a diversified capital management strategy designed to create long-term risk-adjusted returns across varying economic and interest rate cycles. Annaly prioritizes capital return with a long-standing dividend payment policy. The current annualized payment of $2.60 per common share gives a forward yield of 12.8%.
Fandetti upgraded Annaly’s rating to Overweight (i.e., Buy), with a $23 price target implying an 11.5% upside for the coming year. AGNC Investment is another REIT focused on mortgage-backed securities. The internally managed firm has a $66 billion portfolio, with over $59 billion invested in Agency MBSs.
AGNC pays its dividend monthly, with an annualized rate of $1.44 per common share, giving a forward yield of 13.9%. Fandetti upgraded AGNC to Overweight (i.e., Buy), with a $12 price target indicating the potential for a one-year upside of around 14%. This stock’s combined upside/dividend return potential for the year ahead comes to approximately 28%.
Both Annaly Capital Management and AGNC Investment come recommended with Strong Buy consensus ratings from analysts, making them notable opportunities for investors seeking high yields in a favorable rate-cutting environment.
