22 Nov What stocks benefit when interest rates rise?

Q. With interest rates set to rise — sometime — what stocks will do best?
— Investor

A. Interest rate fluctuations will have differing impacts on stocks, and this is mostly driven by their economic sectors.

The stocks that have the most at risk from rising interest rates share two characteristics, said Andy Kapyrin, director of research at RegentAtlantic in Morristown.

They tend to pay high dividends and they tend to issue a lot of bonds themselves, Kapyrin said.

He said these characteristics are most pronounced among utility companies and Real Estate Investment Trusts (REITs).

Rising interest rates will squeeze these companies from two directions, he said.

“First of all, they make their high dividend payouts less attractive relative to investing in bonds,” he said. “Secondly, rising interest rates will make their own cost of capital go up, making them potentially less profitable.”

So, what companies are likely to do better? Those with dividend distributions closer to or below market averages, and those with little debt, Kapyrin said.

“One surprising sector that may benefit in a rising interest rate environment is insurance companies,” he said. “Insurers set insurance rates in part based on what they believe they can earn on their investment portfolios. Rising rates may allow them to offer richer benefits and compete for new clients.”

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This post was first published in November 2016.