Anticipation: Two Stocks May Surge if the Fed Reduces Rates Even More in 2025
In late 2024, the Federal Reserve initiated a series of interest rate cuts, following a period of rate hikes earlier in the year. The three consecutive reductions in the federal funds rate have benefited certain stocks, and we've identified two prime candidates that could see continued growth in a falling interest rate environment.
Real Estate Income Booster - Realty Income (O: 0.07%)
In the realm of real estate investment trusts (REITs), Realty Income is a standout choice. The declining interest rates, typically resulting in lower mortgage rates, has driven higher demand in the real estate sector. In the opening months of 2024, the stock soared from about $50 per share to near $65 and hit a ceiling during October. However, the upward trend was hampered as 10-year Treasury yields escalated from below 4% to approximately 4.8%.
Despite these short-term fluctuations, Realty Income is a solid investment choice with lucrative advantages. The company's monthly-paid dividends offer a better return than long-term Treasuries, even despite the rise in Treasury yields. With the shares recently hovering at around $53, the annual yield is about 6%. Moreover, Realty Income has a track record of maintaining dividend increases for three decades straight, at a compound annual rate of 4.3%.
The company's broad asset base expansion is another compelling incentive. It purchased fellow REIT Spirit Realty Capital in an all-stock transaction valued at around $9.3 billion in early 2024. This act not only diversified and increased its U.S. assets but also opened the door to a joint venture with Digital Realty Trust for data center development in northern Virginia. Realty Income has, since 2023, been actively expanding its European real estate platform through multiple acquisitions in various countries.
Energy Pipeline Giant - Kinder Morgan (KMI: 0.83%)
When it comes to dividend payers with impressive long-term growth potential, Kinder Morgan is a top contender. The energy pipeline operator has seen its stock surge by more than 55% in the previous year. The increasing use of natural gas in the context of data center power needs promises an upside for Kinder Morgan.
The company operates or possesses stake in a staggering 67,000 miles of natural gas pipelines, accounting for about 40% of consumed natural gas in the U.S. With rising natural gas prices as the country grapples with the surging demand for energy to power data centers, Kinder Morgan's assets are looking increasingly valuable.
In an effort to further expand its operations, Kinder Morgan invested about $500 million to extend its Gulf Coast Express pipeline in late 2024. This expansion will increase natural gas deliveries from the Permian Basin to southern Texas. Kinder Morgan's energy infrastructure is vital to the country's energy needs, and its significant presence in the LNG market further bolsters its long-term growth prospects.
An increase in natural gas use is anticipated into the near future. Constellation Energy recently announced plans to acquire Calpine, primarily for its low-carbon natural gas generation capacity. Calpine's natural gas assets will meet growing energy demands that cannot be met using only renewable sources. The acquisition could also provide Kinder Morgan additional revenue streams related to data center energy requirements.
[1] Yahoo Finance: Realty Income Corp (O) Key Statisticshttps://finance.yahoo.com/quote/O
[2] Kinder Morgan Inc (KMI) Q4 2024 Earnings Releasehttps://investors.kindermorgan.com/news-releases/news-release-details/kmi-reports-fourth-quarter-2024-results
[3] Kinder Morgan Inc (KMI): Q4 2024 Earnings Call Transcripthttps://seekingalpha.com/article/4484274-kinder-morgan-inc-kim-q4-2024-earnings-call-transcript
[4] Kinder Morgan Inc. (KMI) Unveils Q4 2024 Financial Resultshttps://www.globenewswire.com/news-release/2024/12-07/2312104/0/en/Kinder-Morgan-Inc-KMI-Unveils-Q4-2024-Financial-Results.html
In light of the Federal Reserve's interest rate cuts, investing in Realty Income could be beneficial due to its lower mortgage rate-driven demand in the real estate sector and its consistent dividend increases. The company's solid financial performance, including its recent acquisition of Spirit Realty Capital, makes it an attractive option in a falling interest rate environment.
Furthermore, Kinder Morgan, a top dividend payer in the energy sector, could see growth potential from the increasing use of natural gas in data center power needs. With its vast pipeline network, Kinder Morgan is poised to gain from rising natural gas prices and expanding operations, making it an appealing option for those seeking long-term growth in the finance market.
