Investing in Canadian Banks

For long-term buy-and-hold investors nothing really beats having the Canadian Big Five banks in your portfolio.

Many investors already have a stake in at least one of the big five.

Major Canadian banks consistently produce profits from strong growth which results in increasing stock prices and steadily growing dividends paid out to shareholders – and they still look strong.

Be an owner

Make those bank profits work for you.  Canadian banks are considered one of the safest banking systems in the world. There are lots of good reasons to expect more good results in the long term.

  • The Big Five have a dominant domestic market share accounting for approximately 80% of the Canadian financial services sector.
  • Competition from foreign banks is strictly regulated.
  • There is considerable support provided by the federal government.

You can also globalize the financial part of your portfolio:  BNS has exposure to Latin America, TD is big in the US, and Royal Bank has operations in the US, Asia and Europe.

My own portfolio is quite over-weighted in Canadian banks (over 40%) which would horrify any investment advisor and send them into conniption fits because I’m not considered properly diversified.

But I know the risks and accept them.

Banks are not risk free

Make no mistake about it, there is risk involved.  If you can’t bear the thought of any capital loss you won’t find a safe haven in these stocks. Financials temporarily lost more than one third of their share price in the market meltdown in 2008.

They are especially sensitive to economic fluctuations and market influences.  You must recognize that their market values will fluctuate amid concerns about the housing market, the weak oil and gas sector, rising interest rates and threats from new FinTech upstarts.

Focus on the quarterly income you receive rather than daily price swings.

Good income-generating machines

Canadian bank stocks have always been some of the best income producing securities.

They have a solid track record and have a good history of regularly increasing dividend payments.

Using dividends to supplement your income can extend the life of your retirement savings and cut your tax bill if held in non-registered accounts.

Invest in funds that hold banks

If you don’t want to own bank stocks directly, they can be found in the top ten holdings of most Canadian ETFs and Mutual Funds.

Income seeking investors can also invest in ETFs that hold the top five banks along with the National Bank:

  • BMO Equal Weight Banks Index ETF (ZEO) has a MER of .62%.  It pays out .08 cents per unit which gives a yield of about 3.6%.
  • The newer RBC Canadian Bank Yield Index ETF (RBNK) has a monthly distribution of .06 cents per unit which yields about 3.96%.  The MER is a tiny .33%.

Laughing all the way to the bank

Customers may not always love them, but Canadian banks have performed exceptionally well for investors.  Bank stocks are very popular investments.  They have been the foundation for Canadian mutual funds, ETFs, DIY portfolios and institutional investing for decades.

The banks have gobbled up market share in lucrative areas of investment banking, wealth management and insurance and they are responding to the FinTech threat by cutting fees and offering more online e-services.

They will likely buy up FinTech companies going forward, just like they swallowed up Trust Companies and brokerage firms in the past.

The steady growth of banks has allowed them to post rising earnings and announce regular dividend increases.

Do you invest in your Bank?

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2 Responses

  1. gary says:

    i agree marie the 5 big banks give people like us a great income in our draw down stage of our lives. we keep a one year cash wedge to help with recovery if the markets tank like they are right now. if goes longer we will tap into our line of credit. the banks represent about 40% of our investments as well. the way i see it if the banks go down, everything else will be going down as well.

    • Marie Engen says:

      Hi Gary. “if the banks go down, everything else will be going down as well.” That’s something we definitely agree on. I don’t need to draw on my principal for the near future, and in fact, I like that the share price is down right now – just in time to buy some more in my TFSA.

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