This 6% Dividend Stock Is Well Positioned for Rising Interest Rates

Power Corporation of Canada (TSX:POW) could be in a strong position.

| More on:
edit Woman calculating figures next to a laptop

Image source: Getty Images.

The Bank of Canada is rapidly raising interest rates. As inflation surges to the highest level since 1983, the central bank must raise the cost of borrowing money to slow the economy down. This is, unsurprisingly, bad for most stocks. However, some stocks thrive in this environment. 

Here’s a closer look at a stable dividend stock that could be well positioned for the rate hikes that lay ahead. 

Power Corp

Power Corporation of Canada (TSX:POW) is a financial holding company with stakes in major insurance and wealth management firms. You’re probably aware of some of their subsidiaries such as Great-West Lifeco and Wealthsimple. 

Power Corp. has felt the full brunt of the broader stock market correction this year. Economic outlook uncertainty has taken a toll. Moreover, with inflation in Canada at all-time highs above 7%, the company’s core business around insurance products is under immense pressure more than ever.

With the overall stock market under pressure, Power Corporation has underperformed. As a result, the stock is down by about 21%. In contrast, the TSX is only down by about 13%. Despite the underperformance, the company remains a solid pick backed by a solid core business that revolves around offering financial services across North America, Europe, and Asia.

Robust outlook

Power Corporation boasts a 61.6% stake in IGM Financial and 66.6% in the Insurance firm Great-West Lifeco. Last year, its revenue jumped 7.7% to $69.6 billion year after a boost from a jump in total net premiums and fee income. Earnings were also up by about 59% to highs of $4.77 a share.

A move by the Bank of Canada to hike interest rates to try and tame runaway inflation could be a catalyst to spark further revenue and earnings growth. Higher rates allow the company to expand margins on lending activities and secure a better yield on its financial assets. This explains why Power Corporation is still a safe dividend play, despite the recent deep pullback.

The company currently pays a solid 6% dividend yield, one of the highest for anyone looking to generate some passive income. Over the past five years, dividends have expanded at an average rate of 9% annually. The company could see similar growth in the years ahead. 

In addition, the stock is trading at a discount after the 21% pullback going by the price-to-earnings multiple of eight. That means much of the bad news about the economy has already been baked into the stock price. 

Bottom line

Rising interest rates are dangerous for companies with too much debt and narrow margins. However, insurance and financial companies like Power Corp could see some upside from rate hikes. The stock is relatively cheap, and the dividend yield is high enough to justify a bet right now. Keep an eye on this stock. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »