Three short months ago, the entire financial world was wagering on rising rates. They were collectively bearish on Treasuries and shorted them, and the trade became too one-sided, notes Brett Owens, income expert and editor of Hidden Yields.
Bond bears were subsequently “short squeezed” from their holdings as bond prices rose (and rates fell). The squeeze looks done. Which makes right now a compelling time to step over the beaten-down bond bears and bet on rising rates again.
Exactly five years ago, the 10-year yield bottomed at these levels. My bet is that the floor holds and we see a bounce in yields. How should we play this bounce? Let’s start with a bank that is trading at just book value. Here are two top payout plays; both will directly benefit from a rebound in long-term rates.
Popular (BPOP) is a pure play on rising bank profits. It is the largest bank in Puerto Rico and is benefiting from mainland investors who are searching the island for business opportunities.
Our Popular position has rewarded us with 48% returns in just 26 months. But the stock is still cheap here. The stock trades for book value, which means we can buy its assets at fair value and receive its banking business for free. Sound banks typically trade for 1.5 times or even 2 times book value!
Profits will rise as the spread between short- and long-term rates widens. Management is already a generous dividend payer, recently delivering a 13% raise on the quarterly payout.
This raise, combined with the stock’s recent rate-driven pullback, means the bank is a bargain once again. We should buy it before rates turnaround and Popular’s “dividend magnet” drives its price higher.
Two months ago, management repurchased $350 million of its own shares, a fat 4.3% of the firm’s float. It was a smart move with shares trading for just book value. Let’s take their cue and top off our own position.
As the 10-year Treasury yield emerged from the basement in 2020, Charles Schwab (SCHW) saw its net interest revenue take off.
The financial firm reported a hot 35% quarter-over-quarter gain earlier this year, buoyed by gains in income thanks to higher long-term interest rates. This found money has helped propel our shares to a 16% gain in just six months.
The company just reported outstanding 60% year-over-year asset growth thanks to its acquisition of TD Ameritrade. And trading activity is running even hotter, no doubt thanks in part to the meme stock boom.
Schwab now processes 1.6 million trades per day, a 126% increase from a year earlier. More trading is generating more profits, and more cash in our pockets.
Thanks to the 10-year yield ebbing, this is a nice entry point for those who haven’t yet bought SCHW. Net interest revenue (and income) will take off if the 10-year heads towards 2%, and the stock will follow. Best to buy now, before rates really run.