On the global stage, Canada is a minor player. And going by the numbers, you may not expect much on the economic front: with a population (36 million) less than California, Canada ranks 10th for gross domestic product (GDP); and 32nd for GDP per capita. But numbers alone don’t tell the whole story. The thing is, on several fronts, seemingly polite Canadians don’t hesitate to punch well above their weight.
Incredible Cash Machines
For those with a long term investing horizon (that should be everyone, since investing is a long game), who believe that capitalism is going to stick around awhile, the population will grow owing to domestic baby creation, immigration, and ever increasing life spans, and that consumers and businesses will continue to rely on financial institutions … you can’t go wrong with the big five Canadian banks.
These are hulking, multinational corporations operating in a well-regulated (i.e., government oversight) home environment. These are companies that churn out profits to the tune of 1 to 3 BILLION dollars every three months. And who give back to shareholders in the form of dividend increases and share price growth.
On a stock risk/return measure, there isn’t a much safer bet.
- Consider Royal Bank of Canada (TSE:RY)(NYSE:RY), Canada’s largest bank with a $137 Billion market value. Though more than half of its revenue is generated from domestic operations, this is expected to change in the near future as RY has significant American based operations, as well as conducting business in 35 other countries.
Adjusted for stock splits, in 1998, RY traded above $22. Today, it’s trading at $92. And while you’re enjoying the stock ride, every quarter the bank pays a healthy dividend to shareholders. During the past 17 years, dividend payments have increased from 13.5 cents per share to 0.87 cents per share. Typically, dividends are increased twice/year, because they make so much money! Currently, the percentage dividend payout is about 3.75%.
- Next up is Toronto-Dominion Bank (TSE:TD)(TSE:NYSE), nipping at the heels of RY with a $118 Billion market value. TD also maintains a large American presence and is now counted among the top 10 banks in the USA.
Adjusted for stock splits, in 1998, TD traded at above $8. Today, it’s trading at $63. Like RY, dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from 10.5 cents per share to 0.60 cents per share. Currently, the percentage dividend payout is about 3.8%.
- Bank of Nova Scotia (TSE:BNS)(NYSE:BNS) is the most international of the Canadian banks. With a market value of $92 Billion, BNS operates in 55 countries not including the USA.
Adjusted for stock splits, in 1998, BNS traded at $34. Today, it’s trading at $76. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $1.00 per share to 2.88 per share. Currently, the percentage dividend payout is about 4.0%.
- Bank of Montreal (TSE:BMO) (NYSE:BMO) sports a market value of $61 Billion and has substantial US operations.
Adjusted for stock splits, in 1998, BMO traded at $32. Today, it’s trading at $93. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.25 per share to 0.90 per share. Currently, the percentage dividend payout is about 3.8%.
- Canadian Imperial Bank of Commerce (TSE:CM)(NYSE:CM), weighs in at $42 Billion market value. Outside of Canada, CM has operations in the USA, Europe, Asia, Australia, Latin America, and the Caribbean.
Adjusted for stock splits, in 1998, CM traded around $36. Today, it’s trading at $106. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.33 per share to 1.27 per share. Currently, the percentage dividend payout is about 4.8%.
What To Buy and When
You’ll get opinions all over the map on the issue of which bank stocks offer the best investment potential. Although I’m not about to throw my hat in the ring here, I will say that sound arguments may be made for any of the banks listed in this post. And if you can’t decide which one belongs in your shopping cart, then you may want to opt for one of the following exchange traded funds (ETF):
- ZWB, Covered Call Canadian Banks, issued by Bank of Montreal, currently pays a +5% yield with a 0.72% management fee.
- XFN, S&P/TSX Capped Financials Index, issued by iShares, currently pays a 3% yield with a 0.55% management fee.
The Magic Key: BUY ON SALE!
Whether you buy an individual bank stock or an ETF, your portfolio will greatly benefit from patience.
Currently, bank stocks are trading at about 10% off their 52-week high. This is what I call a middling discount. It’s a decent entry point and you’ll do well in the long run. But you’ll do better if you wait for a deeper discount like what was on offer in January, 2016, when bank stocks were beaten up, so much so that their dividend yields were between 4.5% – 5%, which is a fantastic yield for companies of this quality and size.
If You Can’t Beat ‘Em, Join ‘Em
Sure, there are valid complaints about bank fees and services, and sometimes banks do jump offside, strong arming consumers to pay for unnecessary services. And that’s a topic for another day. For now, from a practical investor perspective, it sure is worth your while to own some of these incredible money making machines.
Think about it: you know those monthly fees you pay out of pocket? Well, wouldn’t it feel better to take from the bank’s pocket, in the form of quarterly bank dividends, to cover the cost of those fees and more? That said, as good as it feels, there are bigger issues at play than taking satisfaction from reaping financial revenge.
Canadian banks offer boringly, consistent profitability. When financial institutions around the world were melting down in 2007-2009, Canada was held up as the model banking system and its banks as the model banks. Yes, Canadian bank share prices were hammered during this time but that was only because investors predictably panicked (in retrospect, this time period was an extraordinary buying opportunity). The banks themselves were never at risk of harm.
Boring isn’t a problem. In the world of investing, boring is often exactly what you want. You want the unassuming turtle portfolio that grows little by little, year after year. The one that makes you wealthy.
Be patient and wait. Ordinarily, the mind does just the opposite. Grumbling for that which has not happened. Complaining, not grateful. Desiring instead of creating the capacity to receive. Create the capacity to receive and much will happen.