3 shares to buy that can benefit from rising interest rates

As the Bank of England meets again, Jon Smith highlights several shares he’d like to buy that aren’t suffering the negative impact of rising rates.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As the Bank of England meets today, it’s expected its committee will raise interest rates by another 0.25%. This will take the base rate to 5.25%. The rapid rise in the base rate over the past year has put pressure on many companies. Yet there are some shares to buy that actually have performed well despite the increases.

Here are three that I’m strongly thinking about buying soon.

Old-school banking

HSBC (LSE:HSBA) is one of the largest banks in the world. Even though it has divisions that make money from advisory services or trading, the core business model revolves around deposits and loans. The bank essentially make a spread between the rate it pays on deposits versus what it charges on loans.

The higher the base rate, the larger this spread is. Officially, it’s know as the net interest margin (NIM). Over the course of the past year, this margin has been rising and rising.

Evidence of the benefit can be clearly seen in the jump in profit from H1 2022 to H1 2023. Pre-tax profit was $9.2bn in H1 2022, which then soared to $21.7bn this year.

In the report, a large factor in this was the net interest income. The share price has jumped 18% in the past year.

As a risk, the bank will be hindered if interest rates keep rising as it could force mortgage and other loan defaults.

Winning against peers

Sage Group (LSE:SGE) is an global enterprise software company. The stock is up an impressive 41% over the past year.

The top line revenue has been growing consistently in recent years, with a big push in cloud computing and finance software helping to lead the way.

Yet another factor I believe has helped the business is the competitive advantage it has with low debt. In the half-year report, the debt to EBITDA ratio was just 1.3x. This is a very low ratio and shows to me that the business doesn’t have anything to worry about with the borrowings.

However, growth stocks in the cloud computing space often have very high debt levels to help fuel fast growth. Higher interest rates make it more expensive to take on new debt, costing more in interest repayments.

Therefore, I think Sage Group is actually benefitting over it’s rivals as it isn’t feeling the pinch of higher debt costs.

Providing high income

Finally, I’ve noted TwentyFour Income Fund (LSE:TFIF). The stock is down 4% over the past year.

The fund specifically targets bonds and other asset-backed securities to invest in. This includes products like mortgages. As interest rates climb, the yield on these kind of assets increases. So the business has really benefited from being able to generate more income for shareholders over the past year.

Evidence of this can be seen from the dividend yield, which currently sits at a juicy 9.88%. I feel this yield is sustainable as long as interest rates stay elevated.

Granted, the area that TwentyFour operates in is pretty niche. This means it’s concentrated in the investments it makes. There’s very limited diversification to protect it if this part of the market has a wobble.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Sage Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing For Beginners

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How to earn passive income using the Warren Buffett method

Warren Buffett’s investment in Coca-Cola earns spectacular passive income. Stephen Wright looks at how to try and make a similar…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d drip-feed £300 each month to aim for £1m using a Stocks and Shares ISA

Zaven Boyrazian explains how to use stock picking to push a Stocks and Shares ISA towards millionaire territory through regular…

Read more »

Trader on video call from his home office
Investing Articles

What should I buy in my 2024 Stocks and Shares ISA? Here’s what the experts say

I've been looking for ideas of what to buy for my Stocks and Shares ISA in 2024, and at what…

Read more »

Young Black woman using a debit card at an ATM to withdraw money
Investing Articles

Here’s why I’d buy UK stocks to earn passive income in 2024 and beyond

We're near the New Year, and people all over the country will be thinking about how to build up some…

Read more »

Two gay men are walking through a Victorian shopping arcade
Investing Articles

£30k in savings? Here’s how I’d aim to turn that into passive income of £50k a year

Charlie Carman explains how he'd aim to build a chunky passive income portfolio over time with £30k in savings and…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Why I expect the stock market to rally in 2024

2023 has been a mixed year in the stock market so far. But Stephen Wright thinks share prices can finish…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in Fundsmith Equity in 2024?

This Fool is wondering whether the New Year might be a good time to invest some cash in Terry Smith's…

Read more »