Jason Rager Discusses an Ideal Portfolio to Combat a Rising Interest Rate Environment

As 2024 draws to a close, we transition from a period of historically low 10-year Treasury yields. Investors face new challenges in positioning their portfolios for a rising interest rate environment. With higher rates impacting valuations, it’s crucial to adapt investment strategies to mitigate risks and capitalize on opportunities. One effective approach is to focus on value-oriented investments with low price-to-earnings (P/E) multiples.

In a rising rate environment, companies with significant future cash flows—such as high-growth tech giants like NVIDIA tend to see their valuations compressed. Higher discount rates reduce the present value of these future cash flows, often driving down the prices of these “high flyers.” In contrast, value stocks, which are already trading at lower multiples, tend to be less impacted and may offer better opportunities for stable returns.

The good news is that certain sectors and types of companies often fit the profile of value investments. These include:

Reliable Dividend Growers: Companies often referred to as Dividend Kings or Dividend Aristocrats—those with a long track record of consistently raising dividends—can provide both income and stability.

Master Limited Partnerships (MLPs): Often tied to energy and infrastructure, these companies typically offer strong cash flow and attractive yields.

Consumer Staples: Businesses that provide essential goods tend to have stable demand regardless of economic conditions. 

When selecting stocks to acquire in 2025, prioritize companies with pricing power, which allows them to maintain or grow profitability even in challenging economic conditions. Pricing power refers to a company’s ability to raise prices without significantly losing customers. It is a critical factor in identifying businesses that can thrive in an environment of inflation and rising rates. 

Below are the key attributes that confer pricing power:

In industries with limited competition, such as monopolies or oligopolies, companies wield significant pricing power. For example, Microsoft’s dominance in operating systems enables it to adjust pricing for Windows with minimal customer loss.

Unique products or services, or those with superior quality compared to competitors, allow a company to command higher prices. For instance, premium products in niche markets often benefit from this advantage.

Companies with strong, recognizable brands—like Coca-Cola or Colgate—often have loyal customer bases willing to pay a premium. These businesses can weather economic shifts while maintaining profitability.

Businesses with recurring revenue models, such as subscriptions or services that create high switching costs, benefit from loyal customer bases. These customers are often less sensitive to price increases.

Companies with lower production or operational costs have a natural advantage. For example, a strategically positioned mining company with local operations may avoid shipping costs that competitors cannot. This cost advantage strengthens its ability to remain competitive even when prices rise.

By seeking companies with low P/E ratios, discounted valuations, and significant pricing power, investors can navigate a rising interest rate environment more effectively. These investments not only help protect capital but also position portfolios to generate reasonable returns despite macroeconomic challenges and rising interest rates.

A bit about the author: Jason Rager is a Board Member for the Rager Foundation which is non-profit located in Wilmington, Delaware.