Higher Rates to Challenge the Consumer: Are You Prepared?

Industrial Alliance Insur. & Fin. Ser. (TSX:IAG) is among the financials to benefit in this market.

| More on:

Low rates and the resulting increase in consumer spending have been big drivers of economic growth in Canada. From automobile purchases to real estate to everyday items, consumers have been taking advantage of cheap credit and living beyond their means.

But, at the end of the day, the fact remains that long-term growth is sacrificed when rates are low and debt levels soar.

The CMHC reported on an international study that concludes that a one percentage point increase in household debt to GDP tends to lower growth in a country’s GDP by 0.1 percentage point at least three years later.

It’s been years that we’ve been hearing the same story. Household debt is at record highs and is too much of a burden. But household debt continued to get even higher, as economists kept on sending warning signals that investors and consumers alike ignored.

Here we are today, with rates finally having risen for the first time in seven years to the current overnight rate of 1%, and with all signs pointing to further increases, investors and consumers would be wise to heed the warning.

According to Statistics Canada, household debt is currently at a record 167.8% of household disposable income — up from 166.6%.

So, what can you do?

Besides getting your finances in order and ensuring that you keep our own debt levels in check as best as you can, there is a place in the market that will benefit from these higher rates, and a place that will be hit; namely, the financial sector and the consumer discretionary sector.

With $1.2 billion in total assets, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is currently Canada’s biggest bank with the most assets and the second-most deposits.

As interest rates rise, the spread between the rate the banks pay customers and the rate the bank receives widens, bringing more profit to the bank’s bottom line.

Since 1995, the bank’s dividend has grown at an annualized rate of 11%, and the current dividend yield is an attractive 3.6%.

Life and health insurance companies also stand to benefit from a rising interest rate environment, as rising interest rates mean that the cash flows generated by the company’s assets will be invested at higher yields, falling to the bottom line.

With a primary focus on the Canadian market, Industrial Alliance Insur. & Fin. Ser. (TSX:IAG) stands to gain the most of its peer group from rising interest rates. The company has disclosed that a 10-basis-point increase in interest rates will impact net income by $23 million.

Industrial Alliance currently has a dividend yield of 2.4%, and I believe that recent stock price strength has reflected this fact.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas does not own shares in any of the companies listed in this article.

More on Dividend Stocks

thinking
Dividend Stocks

Should You Buy BCE Stock for its 8.6% Dividend Yield?

Down over 20% from all-time highs, BCE stock offers you a tasty dividend yield in 2024. But is the TSX…

Read more »

grow dividends
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how high-quality TSX dividend stocks and the power of compound interest can help grow your investments by 400% or…

Read more »

Paper airplanes flying on blue sky with form of growing graph
Dividend Stocks

2 Soaring Stocks I’d Buy Now With No Hesitation

These two stocks may be the most expensive on the market, but they're high for a reason! And I'm still…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Invest $374.50 Each Month to Create Passive Income of $288 in 2024

Investing a specific amount each month to create passive income this year is possible with monthly dividend payers.

Read more »

Happy retirement
Dividend Stocks

2 Stocks to Help Turn $100,000 Into $1 Million

If you want to reach $1 million, $100,000 can certainly get you there. Even if you invest in some low…

Read more »

warning or alert
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

There's no shortage of companies that raised their dividends recently. Here's a trio of options to consider buying now.

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

Don’t Look Now, But These 3 TSX Stocks Look Poised for a Nice Rally 

Three TSX stocks are in a downtrend amid headwinds. 2024 may be rocky for them, but they are poised for…

Read more »

protect, safe, trust
Dividend Stocks

3 Safe Dividend Stocks to Beat Inflation

These three dividend stocks are excellent buys to beat inflation, given their solid underlying businesses and high yields.

Read more »