Persistently high domestic inflation recently prompted the Bank of Canada to raise the policy interest rate to 0.50%, with further hikes planned along the way. As a result, growth stocks and long-duration bonds will likely suffer for a while, leaving even balanced portfolios with losses.
Not all hope is lost, though. Investors can still make gains in this situation by investing in sectors that perform well in a rising interest rate environment. For instance, banks can charge higher interest rates on their loans, which increases their revenue and profitability. This makes bank stocks great potentially defensive plays.
Compared to a year ago, the Solactive Equal Weight Banks Index is up 24.99%, easily outperforming the 18.98% increase seen by the broader S&P/TSX Capped Composite Index. Numerous Big Five banks smashed analyst estimates, easily meeting guidance for revenue and earnings growth.
Investors looking to tilt their portfolios to the banking sector should focus on the big-name, large-cap stocks out there. These are large-cap, blue-chip companies with solid balance sheets, strong cash flows, and profitable margins. Let’s take a look at my top two picks today!
Bank of Nova Scotia
Founded in 1832, Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) is one of Canada’s largest banks, with over 1,300 domestic branches and 3,766 ATMs in operation.
BNS currently pays a dividend of $4 per share, giving it a forward annual yield of 4.31%. BNS has consistently been a great long-term dividend-growth stock with a five-year average yield of 4.68% and sustainable payout ratio of 46.37%.
The stock goes ex-dividend on April 4, so it’s a good idea to buy now if you want to collect the dividend. BNS currently has a beta of 0.85, making it slightly less volatile than the overall market.
Bank of Montreal
Founded in 1817, Bank of Montreal (TSX: BMO)(NYSE: BMO) is another one of Canada’s Big Five banks with around 900 branches and 3,300 ATMs in Canada and the U.S.
BMO currently pays a dividend of $5.32 per share, giving it a forward annual yield of 3.48%. BMO is also a great long-term dividend-growth stock, with a five-year average yield of 4.01% and sustainable payout ratio of 34.75%.
BMO will go ex-dividend on April 29, so investors should buy soon if they want to collect it. Currently, BMO is slightly more volatile than the overall market with a beta of 1.16.
The Foolish takeaway
Thousands of Canadian investors and numerous high-dividend funds have made BNS and BMO core holdings in their portfolios. These Canadian banks offer a unique blend of stability, income, and growth potential unrivaled by their U.S. counterparts. Over the last decade, the banking sector has outperformed the broader TSX handily.
Both BNS and BMO have a history of unbroken dividend payouts and increases, consistent earnings beats, share splits, and sound management. Buying shares now could be a great way to lock in a low yield on cost before rising interest rates increase the banks revenue and valuation.
