Where Smart Money is Going as Canadian Interest Rates Climb

man sitting in front of 3 screens programming
Image source: Getty Images

Written by Amy Legate-Wolfe at The Motley Fool Canada

Climbing interest rates aren’t exactly ideal for most Canadians. Higher rates mean higher mortgages, higher car payments, and other expenses that can seriously affect your bottom line.

However, smart investors doing this for a while know that there are other industries which actually benefit from rising interest rates. So today, let’s look at two sectors and some stocks that are likely to do well even as Canadian interest rates climb.

Banks

Banks, in general, can typically take advantage of higher interest rates. However, Canadian banks in particular do quite well. There is an oligopoly in the Canadian banking sector. Less competition means fewer options for Canadians to choose from, and more money the banks can collect.

This allows Canadian banks to bring in even more provisions for loan losses. This is incredibly helpful when loan losses are high in a poor economy. However, high interest rates allow Canadian banks to earn more money from interest. With credit less available, consumers have to pay more to borrow.

Therefore, a top choice I would pick right now is Royal Bank of Canada (TSX:RY). This Canadian banking titan is the largest of the Big Six Banks with a solid history of growth. This comes from the wealth and commercial management sectors doing quite well. Of course, it won’t emerge unscathed. However, it will have the provisions and interest rate protection to allow for quick growth.

With shares trading at 10.9 times earnings as of writing and a dividend yield of 4.75%, it’s a steal. Add in that shares are down 9% in the last year and investors are sure to see a quick recovery they can bank on in the near future.

Insurance

Another area that can do well during higher interest rates are insurance companies. In fact, these companies can flourish! The higher the interest rates, the better the growth for these companies. These companies actually may not do as well during lower interest rate environments, providing protection during today’s poor market volatility.

What’s more, however, there are some Canadian companies that provide stability as they are cash-rich companies. These are companies with a low debt-to-equity (D/E) ratio. This means they won’t have a ton of debt to pay off should something go seriously wrong. Instead, they have steady cash flows with low debt to provide safety for investors.

A great option these days is cash-rich company Manulife Financial (TSX:MFC). The stock holds a 5.98% dividend yield as of writing and trades at just 3.6 times earnings! That’s despite shares climbing 11% in the last year and a secure 48.74% D/E ratio.

So with safety on hand, an expanding business, and growth on the way, Manulife stock certainly looks like a strong choice for today’s investor. Especially in this high-interest environment.

Bottom line

Interest rates climbing can be a scary thing. But it doesn’t have to be. Instead, try looking for stocks that will do well with rising interest rates. What you’ll find is that Manulife stock and Royal Bank stock are two secure and stable companies that are likely to continue climbing not just during high interest rates, but long term.

The post Where Smart Money is Going as Canadian Interest Rates Climb appeared first on The Motley Fool Canada.

Should You Invest $1,000 In Manulife?

Before you consider Manulife, you'll want to hear this.

Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in October 2023... and Manulife wasn't on the list.

The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 25 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks * Returns as of 10/10/23

More reading

Fool contributor Amy Legate-Wolfe has positions in Royal Bank of Canada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy

2023