Typically, rising rates benefit financials because they’re able to charge more and it helps to boosts their net interest margins, which is better for the bottom line, explains Michael Giordano, vice president investments at Stone Asset Management Ltd. Cyclicals like the industrial and energy sectors also tend to benefit in this type of environment. On the other hand, debt-laden sectors like real estate, utilities and telecoms may face headwinds as rising rates will drive up their borrowing costs.
“Those are sort of the hard and fast ways to play,” says Giordano, who oversees the Stone Dividend Growth Class, which Refinitiv Lipper recently recognized as the best fund over the past five years in the dividend and equity category. He notes that higher rates could also hinder money flow into the high-growth technology names, adding that many tech companies have already experienced a correction.
A year ago, you could have bought anything down 40%. Even if the business wasn’t fantastic, it was unlikely it would continue to trade at such a huge discount, explains Newman. “Now you want to focus on companies growing earnings,” he says.
Dividend-paying stocks are a good place to be right now if you’re looking for yield, says Newman. They’re not overly expensive and have a reasonable outlook, but you have to look at them on a company-by-company basis.
Giordano shares a similar sentiment. “You’ve got to stay disciplined and you got to focus on quality companies,” he says. Larger companies that have the ability to pass on cost increases to consumers will be best positioned to survive in this environment.
For those of you who have been following our dividends coverage over the years, you’ll find the 2022 best class is a little deeper, with 14 companies atop the list, eight more than last year. The average yield of the top stocks is another notable change, sitting at 5.07% this year 2022, although that figure is somewhat inflated by the 23% yield on Labrador Iron Ore Royalty Co. The average yield dips to a respectable 3.66% when you take out that outlier. Sure, it’s a far cry from the 5.2% average in 2021, but it reflects the recovery. For those still learning the basics, the dividend yield is the annual dividend payout divided by the share price. So, as prices rise faster than the payout, yields will fall.
While you may not find any yields above 5% in the A-grade stocks, half of this group still have yields north of 4%. The fact that the yields are still that high is remarkable, considering how much these share prices jumped last year. And despite the uncertainty of the past few years, many companies we looked at managed to maintain—or even increase—their payouts.
Sometimes stocks are cheap for a reason. Looking back, it feels like stocks were on a once-in-a-lifetime sale. Kudos if you were able to capitalize on the rally, but prudent investors will likely do well to return to the fundamentals.