No one can predict the financial or economic future correctly
and consistently. Still, there seems to be a reasonable chance that
interest rates may rise soon. Inflation's on the rise, and rate
hikes can help keep its effects in check. Unfortunately, they could
also knock your portfolio for a loop.
A recent report from the Bureau of Labor Statistics reveals that
inflation, as defined by the Consumer Price Index for All Urban
Consumers (CPI-U), advanced half a percent in March over February
(which also saw a half-percent jump).
We can take comfort in knowing that the index is only up 2.7%
over the past 12 months, which nearly matches the historic rate of
inflation. Better still, food is only up 2.9%, and electricity has
only increased 1%. But gasoline has increased 27.5% over the past
year, fuel oil is up 34%, and in the past month alone, food at home
has gained 1.1%.
Winners and losers
might stay low
, which benefits home buyers and other borrowers, as well as
investors in banks and mortgage REITs. Banks enjoy paying modest
interest to savers, while charging considerably more to borrowers,
so rising rates can cramp their style.
Weiss Ratings recently found that three-quarters of banks stand
to suffer from rising rates, with
Bank of America
) units in Oregon, California and Rhode Island among the most
) Citibank among those best-positioned for rising rates.
Mortgage REITs, meanwhile, also profit via that spread, ideally
borrowing at low rates and then investing in mortgage-backed
securities that deliver payouts based on higher rates. Business has
been great for such outfits in recent years, making darlings of
companies such as
Annaly Capital Management
) . Since REITs must pay out most of their income in dividends,
this led to hefty, attractive dividend payments -- indeed, both
Annaly and Chimera still offer yields north of 14%! But both have
also announced dividend cuts, and rising interest rates
can threaten those payouts
, which like to invest your premiums at high interest rates, will
probably be happier if rates rise. Low rates make some of their
interest-dependent offerings, such as fixed annuities, less
attractive. Many of these companies are positioning themselves to
profit more strongly when rates rise.
(NYSE: PRU) and
) , for example, have acquired life insurers in Japan, hoping to
capitalize on a market that historically has kept most of its
savings in simple bank accounts.
Whether interest rates rise or stay low, diversification is your
best investment strategy.
If you're invested in mortgage REITs for their high dividends,
augment those holdings with other
. You needn't bail out on mortgage REITs entirely, though, since
many of them are still growing their revenue and keeping dividends
high. Remember that great dividend payers can often offset the
effect of inflation via their dividends alone, leaving stock-price
appreciation as gravy.
It's also smart to diversify geographically. While inflation
might rise sharply in one region, it won't necessarily do so in
another. Include international holdings in your portfolio -- or at
least, American companies with considerable foreign revenue.
(Nasdaq: CSCO) , for example, generates 46% of its revenue outside
the Americas, while that number reaches 57% for
(ABT) . Such companies are somewhat sheltered from fluctuations in
the U.S. economy.
You can't know for sure what the near future holds, but you
don't want to be blindsided by it.
Longtime Fool contributor
owns shares of
The Fool has created a bull call spread position on Cisco
Systems. It owns shares of Abbott Laboratories, Annaly Capital
Management, Bank of America, and JPMorgan Chase; and through a
separate account in its Rising Star portfolios also has a short
position on Bank of America. Alpha Newsletter Account, LLC owns
shares of Abbott Laboratories and Cisco Systems. Try any of our
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