Money As interest rates rise, shore up your portfolio with these financials stocks

22:56  16 april  2018
22:56  16 april  2018 Source:   fool.com

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Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is but one financial stock that is in for good times ahead.

What Happens When Interest Rates Rise ? In other words, the "risk-free" rate of return goes up , making these investments more desirable. As the risk-free rate goes up , the total return required for investing in stocks also increases. As interest rates move up , the cost of borrowing becomes more expensive.

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With interest rates widely expected to continue to rise, investors would be well advised to think about positioning their portfolios in such a manner as to benefit from this undeniable trend.

Despite record consumer debts and very shaky housing markets, unemployment remains at 40-year lows, and inflation is creeping up to the Bank of Canada’s target 2% rate — signaling that all is well with the economy and that rates need to rise further, moving us into an environment of monetary tightening, as opposed to the monetary-easing environment that has worked so well to get us to where we are today.

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Credit Suisse studied stock performance on days of rising rates and declining rates and found financial stocks would have been up Financials are historically the best performers during a period of rising rates , but as interest rates have risen this year, the big-cap financial sector has declined.

The latest markets news, real time quotes, financials and more. (Check out How Interest Rates Affect The Stock Market for an introduction to this issue.) Rising interest rates mean that more conservative instruments will begin paying higher rates as well.

Considering this change, where are the best places for investors to turn?

These four financial stocks are set to benefit in this new environment, and therefore it is a good idea to bulk up on these names.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD)

With $1.2 billion in total assets, TD is currently Canada’s biggest bank, with the most assets and the second-most deposits.

The stock has been a good place to turn to for dividend yield and dividend growth, and since 1995, the bank’s dividend has grown at an annualized rate of 11%.

The stock has also done really well, and has appreciated 24% in the last three years, despite the recent pullback from its highs due to lingering questions regarding the bank’s sales practices.

Nevertheless, on a macro level, TD will benefit from a rising interest rate environment, as it will certainly boost the bank’s numbers, as the interest rates charged on loans will rise, bringing more profit to the bottom line.

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Historically, rising interest rates have often—though not always—been a negative influence on stock prices. In a rising rate environment, this allows an investor to reinvest a portion of his or her portfolio at higher rates .

Just as near-zero interest rates have driven the stock market to all-time highs, rising interest rates will have the opposite effect. Nvidia's products have the potential to grow the company fast enough for the stock to rise even if interest rates are ratcheted up 3 or 4 times this year.

As an offset, higher provisions for credit losses are also in the cards.

TD is currently yielding 3.85%.

Manulife Financial Corporation (TSX:MFC)(NYSE:MFC)

Being an insurance company, Manulife will also benefit from rising interest rates, and although the stock has fallen so far this year, further interest rate hikes will boost the company’s results.

The company is currently seeing strong growth in Asia, and we can expect continued efficiency improvements in 2018.

Manulife expects solid performance in its wealth management segment, where the Standard Life and the New York retirement plan acquisitions will help to boost its position and growth going forward.

Manulife is currently yielding 3.73%.

Industrial Alliance Insur. & Fin. Ser. (TSX:IAG)

With a primary focus on the Canadian market, Industrial Alliance stands to gain the most of its peer group from rising interest rates. The company has disclosed that a 10-basis-point increase in interest rates will impact net income by $15 million.

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The answer to how you should be investing when interest rates rise is fairly simple: you should invest the same way you should always be investing. That means building a diversified portfolio made up of quality stocks , bonds

Rates are rising as inflation expectations pick up , and financial portfolios will require different allocations now than they have in the past, Altfest says. But it is OK to pare these holdings back as interest rates rise . These TIPS Help Protect Your Portfolio .

Industrial Alliance currently has a dividend yield of 2.93%.

Intact Financial Corporation (TSX:IFC)

While Intact’s first-quarter results showed higher-than-expected losses, the company remains a high-quality defensive play in the financial industry.

And with the release of fourth-quarter results, the company announced a 9% dividend increase, signifying that management remains confident in the business as well.

With this stock, investors get access to a quality defensive company with a strong track record, good fundamentals, and upside coming from any future acquisitions.

The stock is currently yielding 2.92%.

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Fool contributor Karen Thomas has no position in any of the stocks mentioned. Intact Financial is a recommendation of Stock Advisor Canada.

It’s not all doom and gloom for Canadian stocks, despite the economic risks .
Martin Pelletier: While the past decade hasn’t been kind for those Canadian investors who stuck close to home, perhaps now is the time that will finally changeSo far, the S&P TSX is among the worst performing markets in the world this year; over a longer horizon, it doesn’t get much better, with Canadian equities having delivered a paltry 4 per cent annualized return over the past decade.

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