Stubborn Interest Rates: 2 TSX Stocks That Can Play Along (and Even Win)

Higher interest rates are actually good for these stocks. They trade at good valuations and provide nice dividends.

| More on:
A worker uses a laptop inside a restaurant.

Source: Getty Images

The Bank of Canada (BoC) raised the target for the overnight interest rate again last month — this time by 0.25%. This raise came after a total increase of 4.0% in 2022. Thankfully, the BoC indicated that it won’t be raising rates for the next while. However, that doesn’t mean interest rates are coming down either. Instead, the target rate is likely to maintain at 4.50% over the near term, as the BoC observes how the higher rates traverse across the economy and curb inflation.

The interest rate hikes appear to be taking some effect. Inflation fell from the 8.1% peak in June 2022 to 6.3% in December 2022. The BoC further projected that the inflation will “fall to around 3% in the middle of 2023 and reach the 2% target in 2024.”

Interest rates are going to stubbornly stay at current levels over the next six months or so. Higher interest rates generally mean higher borrowing costs for businesses and consumers alike. This seems like bad news for the economy. However, some businesses are set to benefit.

How interest rates benefit TD Bank stock

Toronto-Dominion Bank (TSX:TD) stock is a core dividend holding in diversified investment portfolios. It is a top bank in North America — the fifth largest by total assets and market cap. The bank primarily provides retail banking services in Canada and the United States. It also has operations in wealth management and insurance. Altogether, it has about 2,220 retail locations in North America.

At the end of fiscal 2022, it took the first place in total assets ($1.9 trillion) and total deposits ($1.2 trillion) in Canada. When interest rates rise, banks are generally able to lend money at a higher rate versus the interest paid out on deposits. This is the case for TD Bank. In fiscal 2022, the top Canadian bank earned 13% higher in net interest income year over year. This helped drive revenue growth of 15%. Ultimately, adjusted earnings per share rose 5.7% to $8.36 in fiscal 2022.

TD stock is awarded an S&P credit rating of AA-. Investors can buy and hold the shares for the long haul and expect below market risk and above-average market returns. Just ensure you target good valuations for your purchases.

At $92.22 per share at writing, the bank stock trades at a reasonable valuation at roughly 10.8 times earnings. At this quotation, it offers a decent dividend yield of 4.2%. Its payout ratio is sustainable at about 43%.

Sun Life stock

Interestingly, Sun Life Financial (TSX:SLF) stock has delivered higher returns than TD stock in the last decade. Specifically, the life and health insurance stock returned about 16.5% annually versus TD’s 12.6%.

Sun Life actively manages its investment portfolio. It last reported debt securities that made up 43% of its investment portfolio. It noted that 97% of its fixed-income securities were rated investment grade, including 72% that were A-grade. In other words, it maintains a high-quality fixed-income portfolio that should benefit from a higher interest rate than a year ago. This may be why the stock is approximately 24% higher since the start of October 2022.

At $66.87 per share at writing, the dividend stock is reasonably valued and offers a dividend yield of 4.3%. Its dividend is sustainable on a payout ratio of about 47%.

Bottom line

While both stocks are likely to do better in a higher interest rate environment, TD stock provides a bit more advantage to investors based on a slightly bigger discount on the shares.

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 Kay Ng has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

stock market
Stocks for Beginners

A Bull Market Is Eventually Coming: 1 Stock to Buy Now and Hold Forever

Investors may be uncomfortable in market downturns, but try to stay the course and focus on the long term to…

Read more »

TIMER SAYING TIME FOR ACTION
Dividend Stocks

5 Steps to Making $500 in Monthly Passive Income in 2023

Generating monthly passive income isn't as hard as it sounds. Here are 5 steps to start making $500 every month.

Read more »

Various Canadian dollars in gray pants pocket
Stocks for Beginners

3 Passive-Income Ideas to Build Long-Term Wealth

Set up to earn multiple passive-income streams to complement your active income. Dividend stocks are an excellent way to start.

Read more »

woman data analyze
Stocks for Beginners

Got $1,000? 3 Places to Invest for March 2023

New investors should regularly save and invest according to their risk tolerance and financial goals. Here are three places to…

Read more »

Young adult woman walking up the stairs with sun sport background
Stocks for Beginners

Debt-Riddled Canadians: 4 Steps to Manage Your Finances and Grow Your Portfolio

There are so many Canadians drowning in debt. Follow these steps, and you could get out of it before you…

Read more »

Man holding magnifying glass over a document
Stocks for Beginners

TFSA Investors: Make Your Recession Watchlist Now!

These long-term stocks offer immense value for TFSA investors looking to create immense returns coming out of a recession.

Read more »

tsx today
Stocks for Beginners

TSX Today: What to Watch for in Stocks on Thursday, March 23

TSX stocks may remain volatile, as investors continue to assess how the high interest rate environment could affect the economy…

Read more »

A plant grows from coins.
Dividend Stocks

2 Young TSX Stocks You’ll Be Glad You Bought in 10 Years

Youth means nothing when you plan to hold strong companies long term. These two TSX stocks should therefore be first…

Read more »