June 22, 2009, 5:43 am

Are Canadian Banks Stocks Still Good Investments?

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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I have said it before, but I must state it again: Life is pretty ironic.

6 months ago, none of my clients were trusting Canadian banks as they thought they were as “contaminated” as American Banks and other important European Banks. Even the statement from the IMF stating that the Canadian Banking system was the most reliable on earth was not enough to convince that we were having a very stable and safe banking platform.

So since most investors flew away from Canadian Banks, their stocks dropped by 40-50%. During the holidays, most Canadian Banks were offering dividend yield of 7 to 10% (I think I even saw a 11% dividend yield from BMO at one point!).

I remember one client who wanted to take 30K and buy National Bank shares at $25 as he was saying that it was the greatest deal on the stock market. I don’t know if he finally did it (he wasn’t my client) but he is certainly laughing (or crying if he didn’t make the transaction) as the stock soared to $55 last week.

Now that most banks soared back to relatively high level (most bank stocks went up by 40% since December 2008), clients are now asking if they should buy more banks or not. So the question that keeps coming back in my office these days is: Should I buy more Canadian Bank Stocks?

Unfortunately, I can’t give stock trading advice as I am not a broker. The Canadian law is very specific for financial planner. So even though I trade myself and I have all the license to trade, I can’t because my employer doesn’t register me as a broker.

So I won’t give you buy or sell advice today, buy I will give my own opinion (please read the disclaimer at the end of the post). While most of the gravy has been made on Canadian banks, I still think that they are good long term investments.

Dividend is king!

There 2 things I really like about Canadian banks; their solid balance sheet and their high dividend yield (around 5% for most Canadian banks right now). The combination of those two factors promises the dividend payment for a long time.

The thing about high dividend yield stock is that it might not last long. The market usually gives a lower value for the stock in order to have a dividend yield that reflects the risk of non-payment. However, the case of Canadian banks is different; their price drop was related to fear and was not based on fundamentals. Therefore, they became really good investment dividend wise.

So if you are looking for stocks that will cover for the inflation and still gives a great opportunity of growth, Canadian banks should be in your buying target!

Disclaimer: I am not telling you to buy Canadian banks; this post is based on my sole opinion and does not constitute a recommendation. Please trade carefully and do your own analysis.

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[…] The Financial Blogger wonders if Canadian banks are still good investments. […]

what is your perspective on payout ratios? Is it a meaningful indicator of dividend sustainabiliy? For example, BMO and RY have ratios over 90% don’t they? I saw that as a caution sign, but maybe I’m naive.

Well, as long as the dividend payment is intact and not being cut, I wouldn’t care about dividend yields or stock prices.

Now even if a stock yields 5% now and you purchase it for you income portfolio, if the dividend payment does not increase regularly, inflation would eat your income away..

I would think that Canadian Banks are still able to maintain their dividend and they will probably increase it in a few years. They are all increasing their provision for loss on bad debts and will make big profits when taking them out off their balance sheet in a couple of years 😉

Therefore, I wouldn’t worry on their payout ratio for now (it is more dramatic when you look at the oil industry).

I’m waiting for some more stock splits:) That should happen again in what, another year perhaps? When price gets too high, div yields too low? I own all of the Big 5 now, but probably won’t be adding any of the secondary players for a while yet – want to increase these positions first. Also, I have no doubt the big 5 will increase their dividends again soon – probably not in 2009, though.

Well I don’t know too much about stocks, but this blog sure gave me something to think about and look into. Thank you very much for the blog! Take care!