As Interest Rates Rise, This Week’s Income Pick Should Be A Winner
There is only one question traders and investors have following the Federal Reserve’s decision to increase interest rates by half a percentage point — the biggest hike in two decades — to combat inflation…
“What is next for the stock market?”
I admit that higher rates make money more expensive and borrowing less attractive, which has a lot of investors worried for what is to come next. That makes sense because when people are forced to pay more in interest, it leaves them with less money to spend on things like stocks.
But in this type of market, I think further gains will mostly depend on bullish sentiment…
As long as investors are still willing to purchase stocks, further gains are certainly possible. So, I think the better move right now is to ask ourselves what type of stocks have the ability to benefit and generate safe income in a higher-rate environment.
The Financials sector, for example, has typically done well when the Fed has raised rates in the past.
You see, when interest rates climb, so do profit margins and revenue for businesses like banks, insurance companies, brokerage firms, money managers and, you guessed it, the top financial stocks.
If you need a quick refresher, banks make the majority of their money from charging interest rates on things like home, auto and personal loans.
Banks make this money by borrowing funds from depositors and compensating them with a given interest rate to only then turn around and lend that money to another borrower for an even higher rate. In the simplest of terms, banks profit from the difference between the two interest rates.
But what I really want to point out is that the higher the rate hike is, the greater the net interest income banks are expected to earn.
In other words, it isn’t unusual for financial services firms like banks and brokerages to experience boosts in interest rate income and profit margins when the Fed decides to increase rates.
So rising rates can push financial and bank stocks higher, which brings us to this week’s recommendation in Discover Financial Services (DFS).
As the name suggests, Discover is a digital banking and payment services company. It offers things like checking and savings accounts, student loans, home equity loans and reward credit cards.
The bank’s credit card side of the business makes it a natural hedge against inflation because issuers typically pass on higher rates to cardholders. For instance, if your APR is set at 10%, your rate could move to 10.50%. If the cardholder fails to pay the balance when it is due, the bank charges interest fees to the account.
Discover reported a net income of $1.2 billion when the company released its first-quarter earnings report on April 27.
The company’s credit card loans ended the quarter around $74 billion — that’s a 10% year-over-year increase — while its net interest income rose 6% to $149 million versus the previous year.
Shares of DFS were hit hard by the COVID-19 pandemic just like every other banking entity out there. The stock nosedived to the $23 level by the middle of March 2020, pushing its share price back to where it was trading in 2011.
However, all of the losses have since been recovered.
The stock has been trading in a range between $100 and $135 for the past year, remaining above its pandemic-driven lows ever since.
As a result, the stock is on an Income Trader Volatility (ITV) “buy” signal, which means now is an ideal time to benefit from selling put options.
To give ourselves added protection in a market that continues to be volatile, I’m picking an expiration date that is about five weeks out and a strike price that gives us an additional 25% cushion from current prices.
If you’ve never used options before, you might be a little worried about trying. I understand why, but after helping thousands of folks use them — people who are probably a lot like you — I can say that they’re not nearly as difficult or risky as you might think.
Most of my new subscribers had never traded options this way before… and they are now making thousands… even tens of thousands of dollars in extra income. Every month.
Since we launched Income Trader in 2013, we’ve closed more than 400 trades… and yet we’ve been able to maintain a win rate over 90%. Some readers who follow my weekly trades are collecting thousands of dollars every month. If you’d like to be one of them, simply go here now.