Earlier today, the Bank of Canada raised the benchmark rate from 0.75% to 1% as the economy has continued to fire on all cylinders. Given the higher rate borrowers must now pay to obtain funds and the higher revenues which will be made by the institutions loaning the money, the expectations around investment returns have shifted once again. Although a quarter-percent may not seem like much in regards to the total financial cost to consumers, this is the second increase in a relatively short period for Canadians.
Although a rate increase is something that has not been seen in quite some time for many older Canadians, they have been through this before and will now be in a much better position to handle this increase. An entire generation of younger Canadians, however, have never been through a rate increase and have yet to realize what it means to pay a little more money on a large amount of debt outstanding.
Given the new higher rates of interest, the two best options available to consumers would have to be either the big banks or Canada’s insurance companies. As institutions such as Bank of Montreal (TSX:BMO)(NYSE:BMO) will now be charging more on variable loans and new fixed-rate borrowings, the company is in prime position to increase the bottom line as many consumers have gone heavily into debt and will remain there for a long time. Given that shares were almost flat for the day, investors may be wise to purchase early as higher rates will lead to higher profits on the borrowing side of the business.
Another fantastic stock to buy would be Manulife Financial Corp. (TSX:MFC)(NYSE:MFC), which offers investors a yield of 3.5% and holds a substantial amount of deposits from customers. Given the higher rates of return for risk-free investments, the company will now see these higher returns flow directly to the bottom line. After close to a decade of very low returns, insurance companies are finally being offered some breathing room, which will benefit shareholders a great deal.
For companies to avoid, shares of Canada’s airlines come to mind. Although WestJet Airlines Ltd. (TSX:WJA) is a very well run company, the future of this company may not be as prosperous as many believe. As consumers have taken on debt and must put forth a higher amount of their disposable income to maintain their loans/lines of credit, there will be fewer dollars left over for the enjoyable things such as travel. Shares of WestJet have not moved materially for the day, but they do offer investors a dividend yield of slightly more than 2%. At the risk of an economic downturn, the low-risk play may just be to avoid this name and sector altogether.
