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Many investors remain unprepared for the upcoming rise in interest rates. But you shouldn’t let the idea of rising rates scare you out of making money. There’s one industry that will pay you to capitalize on rising rates.
There’s the saying, “Don’t fight the Fed.” Meaning, when rates get ready to rise, equity investors should take their money out of the market and stuff it under their mattresses. However, historical data suggests that a very different approach should be taken for better returns.
In a study, Bloomberg found that 75% of the time that interest rates were rising, stocks rose as well. This is especially true when inflation is subdued and rates start increasing from low levels. That just so happens to be our current economic environment.
Except, in this case, the Fed would be the ones raising the interest rates because the economy is strengthening. Thus, investors should be less focused on what asset class to own and more focused on what equities.
The regional bank industry is still heavily undervalued compared to the major banks. This industry should also be one of the biggest benefactors of higher rates. Banks have been anticipating higher rates for a couple years now, positioning themselves to capitalize via higher profit margins on loans.
Here are the top three ways to invest for rising interest rates.
No. 1 Way To Invest For Rising Rates: Regions Financial (NYSE: RF)
Regions Financial is a regional bank operating across the South and Midwest. It’s also one of the purest plays on banking, with 90% of its income from business and consumer banking services like deposits and loans.
This bank has also been one of the best in the business when it comes to boosting its net interest margin — a key measure for a bank’s efficiency at generating interest income on its assets relative to the interest it pays on its debts.
In 2011, its net interest margin was 3.07% and it rose to 3.2% in 2013. Earlier this year it hit 3.26% which is above the average net interest margin of 3.1% for all U.S. banks.
With its asset-sensitive balance sheet (meaning it’s positively affected by rising rates), the bank should be a big benefactor of this rising trend, most notably with continued expansion of its net interest margin.
Regions Financial offers the lowest dividend yield of our three regional banks at 2%, but it’s still better than average S&P 500 dividend yield of 1.9%.
From a valuation perspective, Regions Financial, is one of the best investments in the banking space. It trades at less than book value, while the regional banks in the Southeast United States are trading at an average of two times book value.
No. 2 Way To Invest For Rising Rates: Fifth Third Bank (NYSE: FTIB)
Fifth Third became one of the top ten banks by assets earlier this year. It operates well over a 1,000 branches across the Southeast and Midwest regions. It also has a fairly diversified banking model, with a strong presence in commercial banking.
It has been one of the best banks over the last four years at growing its deposit base as they’ve really capitalized on consumers displeasure with big banks and the fees that come with them.
From 2011 to 2013, Fifth Third managed to grow deposits by 14%. Meanwhile, over that same period, the nation’s two largest banks by deposits, JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) only grew deposits by 11% and 3% respectively.
Fifth Third offers a near 2.6% dividend yield, well above the regional bank industry average of 2.2%.
No. 3 Way To Invest For Rising Rates: BB&T (NYSE: BBT)
BB&T has held up much better than some of its peers. Its shares are up 35% since the start of 2008, while the Select Sector Financial SPDR ETF (NYSE: XLF) is down 20%.
It is another regional bank that’s one of the 10 largest in the U.S. by assets, topping Fifth Third by close to $50 billion in assets. BB&T is also another appealing dividend play, offering a dividend yield of 2.6%.
One of the unique and underrated aspects of BB&T is its exposure to the insurance industry. Nearly 20% of its income is from insurance operations. There are a couple things that the bank could do to unlock the value of this business for shareholders.
The bank could spinoff that business or sale it off. Either way, both scenarios would create great value for its shareholders. In the case that BB&T sells its $4 billion insurance business, it could use those proceeds to buy back shares or pay shareholders a special dividend.
The bottom line is that rising interest rates are coming; it’s just a matter of when.
In the case of investing in the regional banks, investing too early is better than too late. The market won’t underappreciate these guys for much longer. These stocks still trade at very attractive valuations and offer dividend income.
Being a customer of one of these banks and getting less than a percent on your savings account is frustrating. Why not buy shares of them instead, and collect a dividend yield well above any savings account while also having the opportunity to capitalize on the stock appreciation?
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