“High interest rates are bad for stocks.”
It’s a statement that has been repeated so many times that most investors simply take it as gospel. It’s true that high interest rates increase the opportunity cost of stock investments. However, if stocks grow their earnings more than rates rise, then they may still become more valuable in a period of rising rates. In 2023, stock prices increased, even though interest rates went up. Many people were surprised that this happened, but it wasn’t all that strange: corporate earnings increased more than rates did.
With that being said, it’s normally a good idea to play it safe with stocks when rates are high. Because high rates raise the opportunity cost of investments, companies that miss earnings estimates tend to be punished more harshly in high-rate environments. Nevertheless, it’s possible to invest profitably in times when rates are high. In this article, I will share three stocks that could benefit from the high interest rates being observed in today’s market.
TD Bank
Toronto-Dominion Bank (TSX:TD) is a Canadian bank stock that has a 4.5% dividend yield at today’s prices. It’s relatively cheap, trading at 10 times earnings and 1.5 times book value. These characteristics make TD a relatively appealing play in any market. However, as a bank, it’s especially intriguing in today’s market. Banks collect more interest income when interest rates rise. They’re among the few industries that actually profit off high interest rates in this sense. In its most recent quarter, TD’s earnings increased 13.6%, just as we’d predict for a bank in times of rising rates. So, TD Bank may be worth holding today.
First National Financial
First National Financial (TSX:FN) is one Canadian stock that can thrive in a high-rate environment. It has a 6.5% yield, and, as a lender, it makes more money the higher interest rates go. In this sense, FN stock is similar to TD Bank. However, it has one very important difference: it doesn’t take deposits.
FN finances its mortgages by issuing bonds and borrowing money. It doesn’t have legions of depositors who can simply withdraw all their money at a moment’s notice. This is a pretty significant advantage. This past Spring, several U.S. banks collapsed because their depositors “ran.” This can’t happen to FN, which has no deposits to speak of. That’s a big advantage. FN is also a high-growth stock: its revenue grew 26%, and its earnings grew 108% in the most recent quarter.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS), otherwise known as “Scotiabank,” is a Canadian bank stock that has a whopping 7% dividend yield. If you invest $100,000 in BNS, you should get $7,000 back each year if the dividends don’t change. Historically, the dividends have changed: they’ve risen! Over the last five years, BNS’s dividend has grown by 5% per year. Unfortunately, this bank hasn’t really delivered the kind of earnings growth needed to support its dividend growth. Its earnings are up 0% over five years. Still, the bank’s payout ratio is fairly low, so the dividend should at least be paid on schedule.
