Interest Rates - Stocktrades Canada

Hi Dan and Mat,

I am in the process of building my dividend income portfolio and have a question regarding the affect of low interest rates on higher yielding stocks. I have heard of ‘rules of thumb’ regarding the affect of low (or high) interest rates on high yielding stocks. My thought was that a low interest rate environment would favour high yielding stocks such as Telus, BEP.UN, TRP, Enbridge, FTS, etc. (since they are in a capital intensive industry they can invest in capital to expand thier business at a low rate) but not so much for banks as they largely rely on yield spreads to make thier income. I am trying to think of this as a spectrum with utilities at one end and banks at the other and am not sure where insurance companies or transports would fall.
I searched for an article in your premium section and did not find it so I decided to ask the question here in order to gather your thoughts on this subject.
If my thinking is messed up please dont hesitate to say so.
Thank You in advance for your reply.
Peter

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Asked on October 16, 2020 1:30 pm

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▲ 0 ▼ ✔	Private answer Hi Peter, Yes - low interest rates is a positive for REITs. Put it this way, anyone that has high CAPEX costs will benefit from low rates as it costs them less to borrow. In a rising rates environment however, they tend to underperform for the opposite reason. Mat Marked as spam Posted by Mathieu Litalien Answered on October 17, 2020 8:12 am
▲ 0 ▼ ✔	Private answer Thank You Dan, And I guess that REITS would fall under the same category as Utilities? This is very helpful. Thank You again, Peter Marked as spam Posted by Peter Banks Answered on October 17, 2020 7:42 am
▲ 0 ▼ ✔	Private answer Hey there Peter. Your thought on telecom and utility companies is definitely right. They perform better when rates are low. Banks perform better when rates are higher. Insurance companies are right in line with banks. Insurance companies have significant investments in securities that are sensitive to interest rates, like bonds. They also sell products that are dependent on interest rates that become less desirable as rates get lower. Think of an annuity for example. In terms of correlation with trucking companies, I'd put things like fuel costs ahead of interest rates in terms of a catalyst. Marked as spam Posted by Dan Kent Answered on October 16, 2020 3:26 pm

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