Hey Kid, Wanna Buy A Stock?

Friends of mine recently welcomed their first baby into this world. To lend a hand, family members and friends showered the beaming mama and papa with practical items such as blankets, clothes, diapers, bibs, bedtime story books, and toys. All fine and good and generous, right? I mean, babies cost money so why not lighten the load somewhat for loved ones by covering some up front costs.

Of course, while appreciated, this sort of welcome to our world financial contribution is measly compared to future costs. Because, as far as I know, babies morph into kids who develop into teenagers that mature into adults. And along the way, during this growth extravaganza, expenses keep coming at you. We’re talking about $230,000 for your average kid (of the no-frills, minimalist variety who attends public school, keeps extra-curricular activities to a minimum, and doesn’t have any special needs) from date of entry to age 18. Yikes!

Being a finance geek (i.e., like geeks of all manner of persuasion, somewhat out of sorts in a harmless, eccentric way), I saw no reason to give a traditional gift. One that would be short-lived, that the kid would outgrow within two, three or six months. Nah. I wanted to give something with staying power. Something with maximum long term benefit to both parent and child. So what did I give? Five shares of Bank of Montreal (TSE:BMO) (NYSE:BMO) stock.

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The Gift That Keeps On Giving

Laughing Friend. “You gave the kid bank shares?!”

BuddhaMoney. “That’s right.”

“How about a briefcase? You get the kid a snazzy leather briefcase to carry the share certificate?”

“Funny. You’re missing the point.”

“Okay, I’ll bite. Why are you the only person on this planet who gives stock as a baby gift?”

Here’s the thing: in the long run, those five shares are likely to pay for a whole lot more than blankets and toys. How so? Because share value will grow over time. Am I certain about this? Nope. Nothing is certain but the usual mainstays, death and taxes.

But here’s what I do know: (1) Canadian banks have been a stellar investment for decades; (2) I bought shares after BMO (Canada’s fourth largest bank) released negative news which caused its share price to drop (I only buy ‘on sale’!); and (3) at the purchase price, BMO pays a 4% dividend.

So at an initial cost of $450, The Mom and Dad will receive an $18 dividend check by the time the kid’s first birthday rolls around. At age 18, assuming share value and dividend payments haven’t changed, The Mom and Dad will have received about $461 in dividend payments alone.

But that’s not all. BMO typically increases its dividend payment once or twice per year. This means the dividend paid goes up and more money is distributed to each shareholder. And I’m confident that share price will increase in value too given the stock’s past performance (from 1992 -2012, BMO’s share price increased an average of 8.14%. If you include dividends, the average annual return was 12.58%. In raw dollars, $10,000 invested in 1992 would have been worth more than $107,000 in 2012).

Of course, in the stock market, historical performance does not necessarily predict the future. But given the outsized role that Canadian banks play in the domestic economy, as well as their business activity outside of Canada (i.e., BMO Harris Bank in USA), I’m confident that BMO will be profitable for some time to come (at $1.4 Billion of profit during the last quarter, BMO does bring home the bacon and then some). Related, ever wonder why your bank fees increase every year? Right, to further pad bottom lines. Another reason to become a shareholder paid BY the bank, not just a customer who pays money TO the bank.

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And They Learn Too …

If The Mom and Dad know little about investing, well, receiving stock as a gift provides an excellent opportunity to learn. And when little Lily or Lenny gets older, they too may start learning the meaning of investing.

Seriously, I spent many years pursuing post-secondary education degrees so I know the importance of reading and writing and math, etc. But what too few schools teach, to society’s detriment, is basic money management.

So when Lily or Lenny becomes a software engineer earning six figures or more, they’re clueless as to what to do with their money. And they’re ripe pickings for becoming indebted, stressed, consumers. Because if they don’t learn something about saving, spending and investing from school or from Mom and Dad, it’s unlikely they’ll make the effort to learn on their own.

I’m not saying that the dream of any kid to become an astronaut, singer or firefighter will be replaced by the appeal of FINANCIAL ADVISOR. And really, nobody wants that as a dream. What I am saying is that learning about investing should be part of every kid’s education. Because they will deal with money in one fashion or another throughout their adult life. And this isn’t a case of a little bit of knowledge being dangerous. Rather, when it comes to finances, a little bit of knowledge leads to questions, leads to more knowledge, and so on, and this goes a long way toward constructing the tools to make sound financial decisions.

Just ask your self this: do you consider your self financially literate? Are you confident making investments? How often are you stressed by money issues? Wouldn’t it be amazing if kids graduated high school and could answer: totally literate, totally confident, and not stressed because I’m fairly knowledgeable and know where to search for answers if I’m stuck.

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Starting Young

There’s a company called Stockpile. They facilitate stock investing by allowing you to buy as little as $5 worth of stock (i.e., often buying fractions of shares) either for your self or as a gift in the form of an e-gift or gift card.

To increase appeal to skeptical kids, tell them they can own a piece of Hershey or Google or Nintendo, can track share price on Stockpile’s site, make trades with your approval, and learn why share price is moving up or down. Will that be enough to get kids interested in investing? Probably not. Kids (and some adults) have a hard time planning for the future and delaying gratification (why save for later when you can spend now?).

It all seems boring to most kids, and many adults. But that’s where you come in, either investing for your own kids knowing they (and you, if investing is not within your comfort zone) will benefit from gaining more knowledge about investing, and from successful investments.

As for me, I’ve been investing money for my kids since they were yay big. And from time to time I slyly bring up the topic, trying to peak their interest. Other times, I blab on about money matters, ignoring their stretching and yawning. Though my attempts rarely work, I figure I’m planting seeds in those mushy brains. And when the time is right, and the brains firm up, those seeds will sprout.

That said, my efforts are starting to bear visible fruit. Both my teenage son and daughter, who work part time jobs and pay for some of their own clothes, like to tell me when they buy a pair of shoes or jeans on sale. ‘The less I pay to someone else, the more money in my pocket, right’, they like to say. Hmmm. Wonder where they got that from? Eventually, I’m hoping to hear something like, ‘the more I save and invest now, the more I’ll have later and the less I’ll stress about money.’ In time. All in good time.

 

 

Canadian Bank Stocks Rock

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.

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Closer Look

  • 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.

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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.


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Enter Buddha

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.