The S&P 500 is still within striking distance of its all-time high, but not all stocks are in the same boat. There are some excellent businesses trading 20% or more below their all-time highs despite strong business momentum. Here are two in particular that are both dividend-paying components of the S&P 500 benchmark index that you might want to take a closer look at.
A proven winner that could benefit from falling rates
Realty Income(NYSE: O) is a real estate investment trust, or REIT, that owns more than 15,000 freestanding properties, mostly occupied by retail tenants. If you've ever been in a Dollar General, Walgreens, or 7-Eleven, just to name a few examples, there's a solid chance you've set foot inside property owned by Realty Income.
Realty Income focuses on properties with recession-resistant tenants. Its tenants sign long-term leases that require them to pay taxes, insurance, and maintenance expenses, and that have annual rent increases built in.
Over the long term, Realty Income's dividend has grown very reliably, and it yields just over 5% at the current price. And while rising interest rates are the big reason Realty Income is down about 22% from its all-time high, it could be a massive beneficiary as the Federal Reserve starts to lower rates.
Realty Income's recent rebound illustrates just how much the stock could benefit from falling rates. Just the recent anticipation of rate cuts and the economic data that indicates they're actually going to happen has caused the stock to rebound 26% from its 2024 lows. But as rates start to come down, it wouldn't be surprising to see Realty Income outperform the market for the foreseeable future.
The top bank stock on my radar right now
Capital One Financial(NYSE: COF) has been a strong performer in 2024 so far but is still down by more than 20% from its 2021 all-time high. There are some good reasons, such as an increased level of credit card defaults and worries about the health of the U.S. consumer. However, Capital One looks like an extremely attractive opportunity, with shares trading 10% below book value, and that's especially true before its pending acquisition of Discover (NYSE: DFS) is finalized.
For starters, Capital One is a highly profitable business because of its focus on high-interest credit card products. Its 6.7% net interest margin is at least double what other big U.S. banks typically produce, and it's not surprising: The average credit card interest rate is nearly 25% right now, according to Lending Tree, and Capital One pays about 4% interest on deposits. Even accounting for operating costs and a reasonable default rate, there's a lot of room for profit.
The Discover acquisition creates some interesting possibilities. Not only will it make Capital One's credit card portfolio much larger, but Capital One will also own a payment network, making it less reliant on companies such as Visa and Mastercard. It could even act as a third-party payment processor for other financial institutions.
To be clear, the nature of Capital One's business makes it one of the more cyclical bank stocks. But if you're of the mindset that we'll get the economic "soft landing" and avoid a recession, Capital One could be a steal at the current price.
Buy for the long term
Although I believe both of these stocks have some major short-term catalysts, such as interest rates and the pending Discover acquisition, I don't know what their share prices will do over the next few months. Both of these are excellent, well-run businesses that should make great long-term investments. Invest accordingly.
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.
