Navigating a Rising-Rate Environment: Here’s My Top “Safe” Stock for Investors

TD Bank (TSX:TD) stock may be a great way to play a rising-rate environment going into the second half of 2023.

| More on:
protect, safe, trust

Image source: Getty Images

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.

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

Paper Canadian currency of various denominations
Bank Stocks

1 Magnificent Canadian Dividend Stock Down 28% to Buy and Hold for Decades

This top Canadian dividend stock is underperforming its large peers this year, but a turnaround could be on the horizon.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

hand stacks coins
Investing

Secure a Wealthy Future With These 3 Canadian Stocks

These Canadian stocks have the potential to appreciate substantially over time and may also enhance returns through dividend payments.

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

analyze data
Investing

3 Blue-Chip Stocks Every Canadian Should Own

These blue-chip stocks are backed by large-cap companies with well-established businesses, solid fundamentals, and a growing earnings base.

Read more »

dividends grow over time
Stocks for Beginners

The Smartest Growth Stock to Buy With $2,000 Right Now

Do you have $2,000 to invest for the long term? These three TSX stocks have and will continue to deliver…

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Best Stock to Buy Right Now: Enbridge vs TC Energy?

Enbridge and TC Energy rebounded nicely over the past year. Are more gains on the way?

Read more »