It may seem difficult to navigate today’s current rising-rate environment. Undoubtedly, many new investors may be unfamiliar with what central bank rate hikes entail at this juncture. You may know that higher costs of borrowing can eat into profitability growth. In a way, high rates can act as some sort of “brakes” on the economy.
So, why bother with raising interest rates in the first place?
It’s a good weapon to fight off elevated levels of inflation. We’ve been plagued with inflation for quite a while now. Inflation hurts our wallets just about everywhere. The price increases have been pretty nasty, and central banks don’t want them to continue making life more expensive for the many whose wages have yet to catch up. Call inflation the invisible tax, if you will. These days, it’s no longer invisible, as it’s been the talk of the town.
Inflation will pass with time, but it’s been so sticky. And a few more jabs (in the form of interest rate increases) from the U.S. Federal Reserve or Bank of Canada may be necessary to deliver some sort of knockout blow.
In the meantime, here are three stocks that can help you make money, even as rates aren’t yet done climbing. Indeed, the “tightening” cycle may be closer to the finish, but there may be a few more strides left to go before the finish line.
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TD Bank: An expanding NIMs play as interest rates rise
The Canadian banks can benefit from higher rates, as their net interest margins (NIMs) look to expand. If you’re a bank customer, you know that you’re not getting market rates, at least when it comes to the Big Six banks.
The difference in rates is essentially enjoyed by the big banks. And as rates climb, the big banks may not be so quick to increase interest on your deposits. Indeed, expanding NIMs can be a nice boost to the deposit-heavy banks. TD Bank (TSX:TD) has a nice retail banking business that can benefit from higher rates and the effect on NIMs.
Though high rates can be good for some aspects of TD’s business, it’s not entirely a boon. Higher rates tend to have a cooling effect on the economy. And as a recession is tested, loan growth could stall, and provisions could begin to weigh a bit.
In any case, TD stock has already seen headwinds work their course. The stock trades at around 10 times trailing price to earnings (or 9.6 forward price to earnings), with a 4.8% dividend yield. Indeed, earnings could retreat in coming quarters, but TD has more than enough capital to weather a few more months of turbulence.
Though the banks aren’t necessarily “safe” as the economy fumbles, I view TD stock as undervalued enough such that rewards potential can more than compensate for medium-term risks. If you’re in it for five years (or more), TD stock is a terrific pick.
The bottom line on investing in a rising-rate world
Rates will steady and descend in time. But we’re not there yet. With a few more rate hikes in the cards, I view the banks as intriguing bargains that may not necessarily view rates as kryptonite.
