Bracing for Higher Rates: Top 5 Companies to Safeguard Your Portfolio

Investors can brace for a higher interest rate environment with top stocks like Sun Life Financial Inc. (TSX:SLF) and others.

On Wednesday, June 7, the Bank of Canada (BoC) elected to raise the benchmark interest rate by 25 basis points. That brought the overall benchmark rate to 4.75%. The BoC has pursued its most aggressive interest rate tightening policy in over 15 years in response to soaring inflation rates that emerged in the middle of 2022. Today, I want to look at five companies that are poised to thrive in this high interest rate environment. Let’s jump in.

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Canada’s top bank has seen some improved margins in this climate

Royal Bank (TSX: RY) is the largest financial institution in Canada. Canadian bank stocks have struggled in the face of economic uncertainty so far in 2023. Indeed, Royal bank stock has dropped 1.2% so far in 2023 as of early afternoon trading on Friday, June 16.

In the second quarter of fiscal 2023, Royal Bank saw adjusted net income drop 13% year over year to $3.8 billion. Royal Bank’s Personal and Commercial Banking segment reported net income of $1.91 billion — down 14% compared to the previous year. Higher staff and technology costs contributed to the decline, while net interest income enjoyed strong growth due to improved spreads.

Shares of this bank stock possess a solid price-to-earnings (P/E) ratio of 12 at the time of this writing. Royal Bank offers a quarterly dividend of $1.35 per share. That represents a solid 4.2% yield.

Here’s why insurers also benefit in a higher rate environment

Insurance companies have historically performed well as interest rates increase. That should spur investors to target TSX stocks like Sun Life Financial (TSX: SLF). This Toronto-based financial services and insurance company provides savings, retirement, and pension products around the world. Shares of Sun Life have climbed 5.9% in the year-to-date period.

This company released its first-quarter fiscal 2023 earnings on May 11. Underlying net income increased 24% year over year to $895 million. Its Group – Health & Protection underlying net income soared 146% year over year to $303 million. Meanwhile, Individual – Protection delivered underlying net income growth of 17% to $291 million.

Sun Life stock possesses a favourable P/E ratio of 13. It offers a quarterly dividend of $0.75, which represents a 4.4% yield.

Don’t sleep on essential retailers as higher rates crunch consumers

Food prices have experienced significant growth in the first half of this decade. While this has put pressure on consumers, grocery retailers are raking in record profits. Loblaw Companies (TSX: L) is the largest grocery retailer in Canada. Its shares have dropped 3.9% so far in 2023.

In Q1 2023, Loblaws delivered revenue growth of 6% to $12.9 billion. Meanwhile, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed 7.8% to $1.44 billion. Shares of this TSX stock possess a solid P/E ratio of 20.

Clothing stocks can also benefit from these developments: Here’s one of my favourites

The BoC has pressed forward with high interest rates in an “overheated economy.” Investors should look to take advantage of the economic dividend and target consumer friendly stocks. For example, clothing companies can also perform very well in this environment. Aritzia (TSX: ATZ) stock has plunged 22% in the year-to-date period.

For the full year in fiscal 2023, the company grew active United States clients by 54%. Retail net revenue increased 53% to $1.4 billion. Meanwhile, adjusted EBITDA climbed 21% to $351 million. Aritzia is trading in very attractive value territory compared to its industry peers.

One more stock to target as interest rates climb in 2023

EQB (TSX: EQB) is another financial stock I’d target in this high interest rate environment. This top alternative lender has thrived in a hot Canada housing market. Its shares have surged 22% so far in 2023.

The company delivered record quarterly earnings in the first quarter of fiscal 2023. Adjusted net income jumped 10% year over year to $101 million. EQB still possesses a favourable P/E ratio of 9.2. The stock offers a quarterly dividend of $0.37 per share, representing a 2.1% yield.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

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