Canadians across the country were likely pumped to see another rate cut come down this September, bringing the key interest rate to 2.5%. While there’s still a little ways to go to reach that 2% target, it does provide at least some relief. Yet another rate cut isn’t exactly guaranteed. That’s why it’s important to plan for the worst, while still hoping for the best. In that case, let’s look at how insurance stocks can be a great way to hedge against higher interest rates.
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Why insurance works
When it comes to insurance companies, these stocks do well when interest rates are higher for longer. The stocks tend to invest heavily in bonds and fixed-income securities. Higher interest rates can thus increase the yield on new bonds, enhancing the investment income for the dividend stocks and improving profitability.
Furthermore, insurers offer more competitive and profitable products. And these are products with higher guaranteed returns, often made possible through increased interest rates. That’s all while not adversely affecting financial margins.
Then there’s the reduced liability, which offers even more value. Higher rates can decrease the present value of long-term liabilities. These include life insurance and annuities. This, in turn, actually strengthens a company’s balance sheet and capital position. All in all, insurance stocks can be a great place to turn during higher interest rates.
3 to choose from
If you’re considering insurance stocks, then there are three to look at right away. They are Manulife Financial (TSX:MFC), Power Corporation of Canada (TSX:POW), and Sun Life Financial (TSX:SLF). Let’s start with MFC, which offers a robust balance sheet and significant cash reserves. The dividend stock is well-positioned to capitalize on rising rates through its investment income, making its 4% dividend yield look stable. This can also be supported through increased investment returns due to higher rates.
Then there’s POW, which also has substantial cash holdings that provide an advantageous position – a position that can improve returns on assets in a high-interest environment. Life MFC, it also offers a strong 4.2% dividend yield, with increased income that can further strengthen its ability to pay dividends while still increasing shareholder value.
Finally, SLF is a top choice for broad exposure across different markets and segments. In particular, Asia has been a high-growth opportunity. Its asset management and health and protection segments both benefit from higher investment income, as well as competitive pricing of insurance products. With a 4.2% dividend yield, there’s enough on deck to sustain and even grow the payments amidst higher rates.
Foolish takeaway
Right now, let’s say you had $21,000 to invest, with $7,000 in each stock. Here’s what that might look like from an investment on the TSX today.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| POW | $58.19 | 120 | $2.45 | $294 | Quarterly | $6,983 |
| MFC | $43.11 | 162 | $1.76 | $285 | Quarterly | $6,981 |
| SLF | $82.76 | 85 | $3.52 | $299 | Quarterly | $7,035 |
All considered, insurance stocks are a way to not only survive but also thrive in a higher interest rate environment. They provide growth from investments, while their products remain essential services to support a dividend. So don’t worry about interest rates. Instead, invest in companies that can help you manage the tough times, and we’ll see you on the other side.
