"The time has come for policy to adjust."
Those eight words from Federal Reserve Chairman Jerome Powell last week were like music to investors' ears. Powell signaled that, next month, interest rates could be reduced for the first time since March 2020.
While the stock market could surge if interest rates come down, some individual stocks should perform especially well. Here are three stocks to buy hand over fist before the Fed (probably) cuts rates in September.
1. Dominion Energy
Utility stocks typically rise when interest rates fall for two key reasons. First, they attract more income investors who are looking for new places for their money since bond yields decrease as rates decline. Second, utility companies often have significant debt levels. Lower rates reduce their cost of borrowing, which boosts their bottom lines.
Dominion Energy (D 0.41%) should be a big winner if and when the Fed cuts interest rates. The Virgina-based company provides electricity or natural gas to more than 4.5 million customers in 13 states.
Many investors will be drawn to Dominion's dividend -- and for good reason. The company has paid a dividend for 386 consecutive quarters. Its forward dividend yield is 4.7% right now. Although Dominion slashed its dividend by 33% in 2020, I don't anticipate further dividend cuts.
Dominion could also have pretty good growth prospects for a utility company. Northern Virginia is home to the world's top data center market, and with artificial intelligence (AI) fueling growing demand for data centers, Dominion should be a key beneficiary of the trend.
2. D.R. Horton
When interest rates drop, mortgage rates usually do, too. And when mortgage rates decline, more Americans can afford to borrow money to build new homes. Rate cuts, therefore, can provide nice catalysts for housing stocks.
D.R. Horton (DHI -0.84%) isn't just any housing stock; it's been the biggest homebuilder in the U.S. by volume for over 20 years. The company operates in 118 markets across 33 states. D.R. Horton builds residential houses and single-family and multifamily rental units, and provides mortgage financing and title agency services.
The stock is surprisingly cheap considering the gains it's racked up in recent years. D.R. Horton's forward earnings multiple is only 12.2. Its price-to-earnings-to-growth (PEG) ratio, based on five years of projected earnings growth, is a low 0.64.
Even if the Fed doesn't cut interest rates soon, D.R. Horton should still be a tremendous winner over the long term. The U.S. continues to suffer from an acute housing shortage, and the obvious solution to this problem is to build more homes -- exactly what D.R. Horton wants to do.
3. Realty Income
Real estate investment trusts (REITs) are another obvious beneficiary of rate cuts. These businesses rely on borrowing to finance the purchases of new properties. When rates are lower, they're able to fund more growth.
While there are several great REIT stocks, Realty Income (O -0.77%) is arguably in a league of its own. The company pays a monthly dividend and has increased its dividend payout for a remarkable 29 consecutive years.
Realty Income owns 15,450 commercial properties. Its tenants include well-known companies such as Dollar General, Walgreens, Wynn Resorts, and FedEx.
The REIT should have solid growth prospects in the U.S., especially with the increasing number of data center facilities. It has an even larger opportunity in Europe. which represents an $8.5 trillion total addressable market.
