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I am planning to hedge against various financial risks by buying stocks that benefit from those financial risks.

For example, I use quite a lot of electricity. I have already purchased stocks of companies that produce electricity using hydropower and nuclear power, mechanisms that are practically immune to fuel cost increases.

I also spend quite a lot of money to purchase gasoline for my car. To hedge against this risk, I planned to purchase enough shares of ExxonMobil that the oilfields I effectively own will provide enough gasoline for my car for its economic lifetime (after I scrap the current car, I will probably choose an electric car due to advances in electric car technology).

Now, the main major remaining risk is the variable interest rate in my loans. 20% of my loans have a variable interest rate right now, and 50% have a fixed 10-year rate. The 50% loan will however be repaid in 25 years, so for the remaining 15 years the interest rate changes to a variable one, or I can opt in for another 10-year fixed interest rate period, but that will happen not at today's rates but rates 10 years from now.

I was thinking if there is a way to hedge against this risk by buying stocks that benefit from rise in interest rates. I refuse to do any short selling or non-stock investments. Of course, one possibility would be to repay the loans, but I don't have money for that right now. Another possibility would be to invest in short-duration bonds, but that also requires more money than I have currently (essentially, it requires a large percentage of my current liabilities).

So, are there any companies that benefit a lot from increases in interest rates?

The electricity use and gasoline use can be hedged by just 3000 USD investment for electricity producing and 3000 USD investment for gasoline producing. I was hoping to get a <5000 USD investment to hedge against the interest rate risk of a 80 000 USD worth of loans. Is this a realistic goal at all, or am I asking too much from a <5000 USD investment? 1% interest rate increase would mean that I need to get 374 USD of more dividends after taxes every year for the 1% increase to cover the increased interest costs. Is it even possible to find a company paying 374 USD of more dividends for every 1% interest rate increase for <5000 USD investment? Of course, the loans will be eventually repaid, so slightly less than 374 USD might be enough.

Related question: Are there ways to hedge against a rise in interest rates, other than refinancing my loan? ...but I don't do short-selling so the answer is unacceptable to me.

Note I live in the Eurozone. I converted the amounts from EUR to USD using today's exchange rates, as I believe most people are more familiar with USD rather than EUR.

  • Here's another related question for you to consider: money.stackexchange.com/q/77550/44232 – Grade 'Eh' Bacon May 11 '18 at 20:17
  • The best way to be immune from interest rate hikes is to pay off all debt. – Chris W. Rea May 12 '18 at 0:55
  • @ChrisW.Rea: That doesn't necessarily achieve immunity from interest rate hikes. Just imagine that you're debt free but have placed your surplus money in long-maturity bonds ... – Henning Makholm May 12 '18 at 11:55
  • @HenningMakholm True, but I'm referring to the case of owing debt, as described. – Chris W. Rea May 12 '18 at 13:11
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I don't follow the logic of your hedging. Yes, power companies (in the U.S.) with fuel cost pass through provisions are relatively immune to price hikes. But they are quite susceptible to market forces which may or may not have anything to do with interest rate hikes. Likewise, buying shares of ExxonMobil will not provide you with "enough gasoline for my car for its economic lifetime" because oil supply or the price of oil is not tied to share ownership.

As for stocks, they are not uni-dimensional. They don't just go up or down only because of interest rates. As @Joe pointed out, when the consumer economy is strong, that's when short term rates are increased. From mid 2004 to mid 2007, the Fed raised short term rates from 1.00% to 5.25% and in the latter part of that time frame, the 10 year treasury rose from about 4% to 5%. Most banks did well as did other stocks as the SPY rose about 35%. Increasing interest rates were irrelevant and it all came crashing down for other reasons.

As for investing in short term duration bonds, they'll pay peanuts. Their price will be adversely affected by increasing interest rates but if they mature soon, as long as you won't need the principal, no big deal.

I also don't understand your question: "Is it even possible to find a company paying 374 USD of more dividends for every 1% interest rate increase for <5000 USD investment?" Dividends do not increase as rates rise. They are a fixed amount and only increase if the company raises them. You don't get MORE dividends "for every 1% interest rate increase."

If you want ~$374 of dividend yield on a $6k investment, consider investment grade preferred stocks. They are currently paying a bit less than 6% so maybe you'd need $6.5k for that yield. Pfd stocks are susceptible to longer term interest rate risk. They may react temporarily to short term increases but they tend to be recovered in fairly short order (months).

Unless you're a sophisticated investor utilizing more complex strategies (short selling, puts, futures, swaps, etc.), you'd probably be best served by concentrating on paying down your debt as fast as you can. Sometimes the simple answer is much better than trying to get "too clever by half".

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There's not a really good answer here. Largely, interest rates are slow moving things, so they're fairly priced in unless there's a big surprise.

Investopedia has an article about which sectors benefit the most. They mostly focus on the financial sector (banks, loan companies), as they have higher margins. Obviously they also have some costs (borrowing from the fed, for example, is more expensive) and some risks, but overall their margins are higher thus profits are higher.

For the most part, though, the article focuses on the fact that the consumer economy is typically strong during a period of rising interest rates because that's why the rates go up. So buying consumer product companies or companies that will do well when consumers have more disposable income, for example.

Overall, though, if you're a fairly simple investor you probably are better simply making investments that are sound regardless of the interest rate environment. The current Fed hasn't shown much interest in returning to the 1970s/early 1980s; interest rates may rise another point or two but we're not likely to see 8% or 10% prime rates any time soon. Unless you're a sophisticated investor using complex instruments/shorts, or a bond ladder or similar (see this article from Schwab), you are probably better off making sound decisions and not "hedging" everything.

And as far as your specific numbers - it's unlikely to find that much more, I would think. You might benefit slightly, but a 10% increase (before taxes) seems utterly impossible.

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