Blame it on my youthful exuberance, but my investment strategy has always been focused on looking for the next big thing, those stocks that carry some risk but hold the promise of significant price increases. I have been the antithesis of Warren Buffett- I wouldn’t buy a stock today that I could imagine still holding in 2 years, let alone 20. Some of those investments (speculations?) proved lucrative- Google, Apple, RIM and Potash Corp of Saskatchewan to name a few, yet there are many more that have gone nowhere. Of course, I don’t like to talk about those- my prescience in telling people to buy Google at $90 a share makes a much better story over a few beers than does my disastrous investment in Canadian Airlines.
I had never been much of an advocate of dividend investing- I viewed it as the realm of the fearful and elderly. But my investment strategies and preferences have softened up quite a bit recently. At a recent meeting of our investment club, I found myself in the unlikely position of arguing the merits of a solid but boring dividend yielding stock over the latest speculative oil stock that was being pitched. And in the same vein, I am now looking to bank stocks as an excellent investment opportunity.
It’s no secret that the financial sector has been taking a real beating as of late. The situation in the US is dire, and most banks on this side of the border have also been seriously affected by this turmoil. However, Canadian banks remain stable and currently offer excellent opportunity for investors seeking both strong dividends and capital growth.
Rob Carrick had an interesting article in the Globe and Mail on Saturday discussing the opportunities currently presented by bank stocks. With share prices low but per-share dividends remaining stable (or even increasing, in the case of TD), annualized dividends for the big Canadian banks currently range from 3.8% to 5.8%. As Carrick points out, there is also good potential for dividend and capital growth:
Take BMO, for example. It’s the most yield-oriented play among the big banks, with a dividend that produced a 5.8-per-cent return on an annual basis as of Sept. 11. BMO’s shares are also the worst performers among the Big Six this year and over the past three- and five-year periods.
If you buy BMO now, you get a dividend yield that far surpasses 2.9-per-cent return on five-year Government of Canada bonds while offering the benefit of the dividend tax credit outside a registered account. To put the current yield in perspective, BMO’s average dividend yield over the past five years was 3.25 per cent.
You may have to wait a few quarters for dividend growth while BMO gets its act together, but there could be a substantial benefit when it does. Not only will higher dividends boost your returns, but there could be a sizable rally in the share price. This is a bank, after all, that has gone virtually nowhere in price over the past five years.
TD offers a different slant on dividend-focused investing. This bank offers the lowest dividend yield among the Big Six, an indication of sentiment that it’s the healthiest name in the group. And yet, that dividend yield is actually high in comparison to the average 2.8-per-cent level of the past five years.
Meanwhile, TD stands out along with Scotiabank for showing investors that it remains a dividend growth stock, even in tough times. The recent increase in the quarterly payout by TD was modest at best - it rose by 2 cents to 61 cents - but highly symbolic.
Recovery in the sector may take some time, but when it does investors should see strong growth in both dividend yield and share price. This may make for dull market watching, but for investors looking for a reliable return in times of market turmoil, shares in the big banks may be just what the doctor ordered- even for me.
Photo by Ian Muttoo.
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i agree bank stocks are good for long term investments, but the problem is how do we select them ?
I’m not sure that the banks are out of the woods just yet. The bankruptcy of Lehman Bros. shows that things are still unstable, and the Canadian banks are too involved in the US market to avoid the fallout. I’d rather wait and see how things play out before sinking any more money into financials.
The banks are a buy! What happened today could be a good trigger to see a little bit more fall in their stock price, but not too much I think.
When I read that article on Saturday, I fully agreed, but after Monday I’m back to being nervous. We’re far from being stable enough to consider the banks a good buy right now.
Hmmm…after today, they must be an even better deal!!
I had written this post on the Sunday before Black Monday and considered revising it after the Lehman news broke, but I don’t think that the activity over the last few days has really changed anything. Canadian banks are still solid and the dividend yields are strong. We might have to suffer through a few quarters of shaky share prices, but I suspect we’ll be amply rewarded.