A few weeks ago, Federal Reserve Chairman Jerome Powell threw the stock markets under the bus with his comments about making stopping inflation the Fed’s top priority. If the central bank follows through, the result will have interest rates moving higher and staying higher for longer than stock market investors were expecting.

That sent stocks down.

But higher interest rates offer not only challenges, but also opportunities, for investors. Let’s take a look at some…

The last few weeks in the market illustrate the challenges. Investing in growth stocks will not be a winning strategy until interest rates peak and the Fed starts to reduce its interest rate target. Currently, market experts talk about rates increasing through the spring of 2023. If that is the case, it will likely be a year before the next stock bull market can get underway.

Investors who followed the 2020-2021 stock playbook will be disappointed. For the next year, I expect the major market indices to remain closer to the June 2022 lows rather than getting back up to the prices in effect earlier in the year.

With all of that in mind, here are some investment themes to consider that will help you make money over the next year:

Higher rates are starting to make fixed-income investments pay at least reasonable returns. Currently, I see six-month CDs on Schwab yielding just over 3.0%. That’s a lot better than the near-zero interest rates of a couple of years ago.

Building a CD ladder allows you to keep your principal secure and participate as rates increase. Divide the money you want to invest this way into five equal amounts. Buy a six-month CD now, and then buy another each time the Fed raises interest rates. When you get all the money invested, you will likely have an average yield of more than 5% off those CDs.

Back into the stock market, a couple of business types will see profits grow as interest rates increase. These companies lend money with variable rate loans and have low leverage with fixed rate obligations.

Commercial mortgage REITs are one group of this type of company. Make sure you look at commercial finance REITs and not residential mortgage REITs. There is a huge difference, and most of the latter do not fare well with rising interest rates.

Starwood Property Trust (STWD) is an outstanding commercial mortgage REIT. Shares currently yield 8.4%, and I expect the company to start to pay out excess profits as special dividends.

Business development companies (BDCs) are another business structure that put out variable rate loans to their clients. BDCs operate under special rules that require them to pay out 90% of net interest income as dividends to investors.

A current favorite, Hercules Capital (HTGC), yields 10.5% on its base dividend, and the company has paid an additional supplemental dividend for the past eight quarters.

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