But it’s also good for the growing lending arms at DFS outside of its credit card business
Discover is a natural beneficiary of a rising rate environment as it can also increase the rate it charges for outstanding balances. Right now, Discover has about $10 billion in student loans and another $7 billion in personal consumer loans.
With projected revenue expansion of 9% this fiscal year, better margins should help Discover accelerate its growth in 2022 if and when higher rates materialize. That’s saying something, considering the stock is already up 40% for the year-to-date.
And after a nearly 14% boost in its quarterly dividend in July, DFS now offers a decent 1.6% yield as a sweetener for those looking at the best stocks for rising interest rates.
- Market value: $31.3 billion
- Dividend yield: 0.6%
Credit data and analytics provider Equifax (EFX, $) is one of the three national credit bureaus that are effectively gatekeepers on nearly all consumer lending. And in a rising rate environment where loans are going to cost a bit more and consumers are eager to get their scores as high as possible to secure the best deal, EFX is very likely to see an uptick in demand for its services.
Additionally, in the last year or so, EFX has made a series of small but important acquisitions to widen its moat further in the lending and financial services space.
All in all, the firm has notched eight acquisitions for about $3 billion so far in 2021. A few noteworthy deals in this group are background check firm Appriss Insights, banking analytics firm AccountScore and fraud prevention firm Kount.
EFX is already on track to grow revenue at about 17% this fiscal year, and a rising rate environment coupled with these business-building acquisitions should really help out this stock going forward.
Equifax is putting in an impressive showing on the charts this year, too, up about 33% so far – roughly double the SP 500 in the same period.
Extra Space Storage
- Market value: $23.0 billion
- Dividend yield: 2.9%
Perhaps the quirkiest play on this list of the best stocks for rising interest rates is Extra Space Storage (EXR, $), a Utah-based real estate investment trust (REIT). This special class of company has to deliver 90% of taxable income back to shareholders in exchange for preferential tax treatment, which means a mandate for big dividends and typically features more conservative capital management as a result.
Well, with some 1,900 self-storage sites in 40 states – making it one of the largest self-storage management companies in the U.S. – EXR is a massive real estate company. And as anyone who has a mortgage knows, real estate is incredibly sensitive to interest rate trends.
Extra Space increased its debt load significantly over the last few years, finishing 2020 with $5.6 billion in long-term debt, up from $4.8 billion the prior year. However if rates rise, that means this investment was very well-timed, with EXR locking in lower interest rates for the significant real estate holdings of this storage stock.
What’s more, unlike some overextended REITs, EXR’s total debt load remains comfortable at just over 60% of total assets – so it’s not like this company broke the bank here.
If inflationary trends do come to pass, and along with them rising interest rates, EXR will be in the enviable position of having lower rates on its real estate loans but an opportunity to increase storage rates to its clients.
Investors have already shown a lot of enthusiasm for direct personal loan lender Virginia this well-run company, bidding up shares by about 47% so far this year. And a recent 25% increase in its quarterly dividend in August now gives Extra Space a generous 2.9% yield.
But another angle that makes Aon attractive is that, beyond this benefit, the company also provides services to institutions regarding their defined benefit plans, endowments and other financial vehicles – and if and when rates change, many clients may want to revisit their strategy as a result.
DFS is accepted at nearly 50 million locations, and tallied some $420 billion in payment volumes last year – and continues to grow in 2021 on top of that.