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3 Stocks Set To Benefit From The Fed’s Rate Hike Cycle

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The U.S. Federal Reserve on Wednesday announced for the first time since 2018 that the U.S. Federal Reserve is at its highest level in 40 years as part of its push to fight the outbreak.

The widely expected move is the first of at least six rate hikes the Fed has signaled this year. While monetary tightening appears inevitable at a time when price pressures are hurting many sectors of the economy, hawkish central banks and the escalating war between Russia and Ukraine translate into higher risks for equity investors.

In the current uncertain economic and geopolitical environment, investors should avoid low-quality stocks and focus on companies with resilient earnings, healthy cash flow, and the ability to protect their margins at higher input costs.

With that theme in mind, we’ve listed below three quality stocks that could benefit in a higher interest rate environment.

1. Costco

If you’re taking refuge in this unpredictable economic environment, stock of retailer giant Costco Wholesale (NASDAQ: ) is for you. The Issaquah, Washington-based company is a solid long-term defensive player thanks to its extensive store network and subscription-based retail model that provides steady revenue. It closed at $552.79 on Thursday.

Historically, large retail companies have been some of the best defensive stocks. Their extensive economic moats, sprawling brick-and-mortar empires, and ever-increasing dividend payments provide investors with the safety net they need during uncertain times.

Barclays said in a recent report that Costco is one of the greatest retailers of all time in the industry, naming it “GOAT” or “Greatest Ever” due to its pricing and supply strategy.

The note adds:

“While COST has never managed the business as profit, we also believe COST is well positioned to generate more profit in today’s environment of strong traffic trends and price gaps with competitors.”

This financial strength allows Costco to reward shareholders with a growing dividend. In November, the company announced a record special allocation of $4.4 billion. Many analysts believe Costco will emerge stronger post-pandemic, giving savvy investors more upside. Costco offers an annual dividend of $3.16 per share at a current yield of 0.58%.

2. Medtronic

Healthcare is an industry that tends to do well when interest rates rise. In this group, we like Medtronic (NYSE: ) because of the company’s strong market position and large payouts. MDT closed at $109.74 on Thursday.

Medtronic Weekly Chart

The world’s largest medical device manufacturer controls 50% of the global pacemaker market. It is also a leader in products to assist in spine surgery and diabetes care.

Stocks like Medtronic will continue to churned out cash no matter how the economy goes. The Dublin, Ireland-based company has a long-term strategy of paying 50% of its free cash flow to shareholders as dividends.

The company has an annual yield of 2.39% and pays an annual dividend of $2.52 per share. Over the past five years, this spending has grown by an average of more than 10% per year.

The company is one of the solid, inflation-resistant stocks with a clear lead in the medical device business and the ability to bounce back in a post-pandemic environment.

Bank of America rated MDT a buy in a report this month, calling it a value name with the most upside potential as elective surgeries pick up pace after several years of stalemate due to the pandemic.

3. Cisco Systems

In a time of high economic uncertainty, Cisco Systems (NASDAQ: ) is another strong bet. The San Jose, California-based networking giant is the world’s largest maker of routers, switches and other devices widely used to connect computers. It’s a cash-rich company that can afford to pay an uninterrupted dividend. It closed at $56.17 on Thursday.

Cisco Weekly Chart

Cisco has significantly improved its future growth prospects, driven by aggressive diversification from a hardware-to-software-driven model in new high-growth market segments such as cybersecurity, applications, and services. For example, by fiscal 2025, subscription revenue will reach 50% of the company’s total revenue.

These growth moves, combined with Cisco’s market leadership in the Americas, put the company in a strong position to generate long-term profits.

Cisco is one of the stocks that global research firm Jefferies highlighted in a report yesterday, saying “ATMs” and quality stocks like Cisco are among the best performers in times of stagflation.

The company currently pays $0.38 per quarter, which translates to an annual dividend yield of 2.65%.

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