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3 Dividend-Paying Stocks That May Gain From Rising Interest Rates

3 Dividend-Paying Stocks That May Gain From Rising Interest Rates

(Dreamstime)

By    |   Wednesday, 08 February 2017 11:53 AM

The Federal Reserve estimates that three more interest rates will be needed this year as the U.S. economy strengthens and the central bank gives itself more leeway to cut rates in a recession.

Rising rates typically mean the dollar strengthens against other currencies, hurting the profitability of American companies, but 3 dividend-paying stocks may see gains, the Sure Dividend newsletter writes in a Seeking Alpha post.

“There are three main groups of stocks who possess this characteristic: banks, insurance companies, and payroll processors,” according to Sure Dividend. “Banks are the headline beneficiary of rising interest rates.”

The Federal Reserve in December raised interest rates for the second time in the past 10 years as the economy showed signs of strengthening in the third quarter while unemployment hovered at nine-year lows. The central bank had lowered borrowing costs to a record low during the 2008 financial crisis that triggered the worst recession in 80 years.

Because banks pay interest on short-term deposits while collecting payments on long-term loans with higher interest rates, like mortgages, they benefit from rising rates. (Of course, their business may suffer if loan volume declines as more people can’t afford to borrow at higher rates.)

“Interest rates tend to rise the most in the long end of the yield curve. In other words, long-term bond yields will experience a greater change than short term bond yields over the same time period,” according to Sure Dividend. “Since the long end changes more than the short end, the ‘spread’ that represents the banks profit will increase in a rising interest rate environment. This spread is called net interest margin and will boost earnings-per-share as it increases.”

Insurance companies stand to benefit from higher interest rates if they earn more money on their investments.

“The vast majority of insurance float is invested in fixed income securities, or bonds, since they possess less inherent risk than stocks. As interest rates rise, new insurance premiums will be invested in higher yielding bonds at higher rates of returns,” Sure Dividend says. “This will boost the earnings of insurance companies in the long run, which is why I’m quite bullish on insurance stocks.”

Payroll processors hold large sums of money from businesses before paying it out to the businesses’ employees, allowing them to earn interest payments.

“While the payroll processor typically holds this capital for only a short period of time, they wisely invest this cash into short-term fixed income securities,” Sure Dividend says. “When interest rates rise, the return on these short-term deposits will rise as well, which will translate positively to their bottom line.”

Sure Dividend: 3 Dividend Payers That May Benefit From Rising Rates

  1. Aflac (AFL): “A giant in the insurance industry, providing insurance products to more than 50 million policyholders worldwide. The company has delivered solid financial performance, compounding earnings-per-share at 8 percent annually over the past decade.”
  2. Automatic Data Processing (ADP): “A payroll processing company that provides services such as payroll execution, benefits administration, and human resource management to all sizes of companies. While ADP is a quality company, it is trading at a high valuation right now. Investors looking to take advantage of current interest rate trends by buying ADP should wait to buy on the dips.”
  3. Cincinnati Financial (CINF): “A diversified insurance company operating under four distinct business lines: life, personal, commercial and excess and surplus. The company is a well-known dividend growth stock, having raised their dividend for 57 consecutive years, one of the longest streaks of any U.S. businesses.”

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The Federal Reserve estimates that three more interest rates will be needed this year as the U.S. economy strengthens and the central bank gives itself more leeway to cut rates in a recession.
dividend, stocks, investing, rates
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2017-53-08
Wednesday, 08 February 2017 11:53 AM
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