Buy This Stock to Protect Investment Yields When Interest Rates Fall

Shah Gilani|July 31, 2023

Contrary to popular belief, the Federal Reserve isn’t done raising interest rates.

Yes, the Fed raised rates last week – but here’s the interesting thing.

PCE inflation numbers came out last week at 3% for June. That’s fine, but that’s only the headline number. The Fed focuses more on PCE Core numbers, which exclude volatile prices such as food and energy.

For June, PCE Core numbers grew at 4.1%. That’s a problem because it means the Fed is likely to raise rates again, later this year. In fact, that’s exactly what they’ve already been saying over the last several weeks.

The takeaway here is, we’re getting close to peak interest rates.

How do we know we’re getting close to peak interest rates?

For the last several weeks, with the Fed Funds range between 5.00% – 5.25%, the actual effective Fed Funds rate, which refers to actual transactions in overnight markets between banks, has been 5.08%. After the hikes last Wednesday, the effective Fed Funds rate jumped to 5.33%.

Rates are high enough now that we could see them coming back down later this year, or early next year.

Case in point, Bankrate came out with data last week that said the average 1-year CD, at well-known banks, was at 5.3%, yet the rate on a 5-year CD is only 4.5%. That tells you that the banks are anticipating rates will come down.

If you’re a fixed income investor, it is a good time to start looking at laddering, whereby you purchase bonds or CDs that mature at staggered future dates, rather than all at the same time – but you could also look at individual stocks with high yields and low payout ratios.

With that said, I’m watching Woodside Energy Group Ltd (WDS), the Perth, Australia-based oil & gas exploration company that produces liquefied natural gas, pipeline gas, condensate, natural gas liquids, and crude oil in Oceania, Africa, the Americas, Asia, and the Caribbean.

The company finished Q4/2022 with record quarterly production of 51.6MMboe (562Mboe/day) which was up a whopping 128.3% over the same period a year ago.

And revenue for Q4/2022 was $5.16 billion which represented a 77.6% increase over Q4/2021.

More recently, on July 19, 2023, the company reported quarterly production of 44.5 MMboe (489 Mboe/day), down 5% from Q1 2023. The reduction was due to a planned turnaround and maintenance activities, so I’m not concerned.

Looking ahead, the company expects to finish 2023 with full-year production between 180-190 MMboe.

The company sports a healthy 38.64% profit margin, has a solid balance sheet with $6.88 billion in cash versus $6.77 billion in debt, and over the trailing twelve months it generated operating cash flow and levered free cash flow of $8.81 billion and $6.69 billion.

Those are very solid numbers, but most importantly for us, the forward dividend rate is $2.53 per share, which at the current price, amounts to a 9.92% yield, and the payout ratio is just 50.2%.

As I write this, shares of WDS are trading at $25.78. I’m watching the stock to see if the stock can breakout above resistance at $26.25, on above average volume. If that happens, and the stock can turn prior resistance into support, I like picking up shares for the juicy yield.

Any time an industry experiences shakeups due to geopolitical conflict, it always creates opportunities to profit. Part of Woodside’s success is attributed to their ability to keep profits up and answer the supply demands caused in part by the ongoing aftershocks of the Russia-Ukraine war.

Right now, tensions are brewing between two geopolitical rivals, the United States and China, over the future of another industry – semiconductor and computer chip manufacturing. The next generation of chips is going to power the AI-driven technologies of the future, and both countries are in a fierce competition to de-couple their past dependencies on one another and make sure they come out ahead.

And when that happens, it’s going to create a high-demand market that will send a handful of stocks skyrocketing. I have a full briefing and investing plan here – now’s the time to check it out.