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January 27, 2021
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    PERSONAL FINANCESTOCKS

    Canadian Bank Stocks – Generous Yields and Growth If you're worried markets might tank, banks provide a nice cushion.

    by Mal SpoonerDecember 8, 2020December 9, 2020 0
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    If you’re worried (as I am) that growth stocks (the tech and now healthcare stocks) are just ridiculously valued, then perhaps you should think about Canadian bank stocks as a potential cushion against a potential market correction.

    Let’s face it, when mortgage rates are less than 2%, where can you park your savings and get a decent (above the rate of inflation) return?

    Canadian bank stocks have staged an impressive rebound from the March (COVID-19) lows despite having set aside massive provisions for potential loan losses.  They’ve all just reported earnings which were better than investment analysts were expecting.  Most important, even at the higher prices they still offer dividend yields in excess of 4%.

    Isn’t there a risk that they’ll experience losses as more businesses are unable to make commercial loan payments and unemployment disrupts mortgage revenues?  In my experience the banks, which are ultra conservative when confronted with a crisis, tend to overshoot when estimating their loan loss provisions, meaning that as loan payments (that were estimated to go bad) from customers continue rather than go sour the provisions find their way back into earnings over time.

    Banks make money on the spread between short term rates (or zero rates when it comes to your deposits) and what they can get in terms of interest income by lending the money out longer term.  The fact that interest rates generally are so low (both short and long term) has hindered profitability to some extent. A steepening yield curve (meaning longer rates are rising) will also boost future profits.

    Longer interest rates have begun to rise which bodes well for the banking sector in general.

    There have been few opportunities over my long career where you can borrow money at a lower rate and invest it at a higher rate.  Those lucky enough to have a homeowner’s line of credit (for example) charging 2% or less can use those funds to buy a basket of bank stocks and provided you document the money is indeed being used for investment purposes, the interest is tax deductible against your income.  The income from dividends is taxed at a reduced rate. It’s a win-win.

    Note from the stock prices how BMO (Bank of Montreal) was not long ago the worst performer of the group and is now one of the best.  A word to the wise – over decades I’ve watched this trend over and over:  The bank that trails its peers (that would be BNS now, evidenced by the highest dividend yield of the group) always manages to move ahead of the pack in subsequent years.




     

     

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    Tagged: banks coronavirus Covid-19 DFP dividends High-Yield Savings investing investments More PFI Coverage Personal Finance Insider pfi PFI GOBankingRates PFI-XAMP savings Savings Account stock market drop
    About the Author

    Mal Spooner

    Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.

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