Thursday, May 29, 2008

Canadian Bank Stocks

This blog is meant for educational purposes only, and not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional.

The banks are currently a good or bad buy depending on the reason for buying them. If you are buying them for dividend income, to me they are a good buy. The yields on banks are currently high. For example, the yield on Bank of Montreal is almost 6%. The yield on the Royal Bank is almost 4% as is the yield for the Bank of Nova Scotia. The TD bank is not as good. Personally, I avoid the CIBC bank so I have no spreadsheet on it.The CIBC is the only bank that anyone questioned if the dividend was safe. In the other banks, what is most likely to happen is that the increases will slow down. These are good yields considering that normally the bank yields are less than 3%.

The Bank of Montreal has increased the dividend at an average annual rate of almost 13% over the last 10 years and almost 18% over the last 5 years. The Royal bank has increased the dividend at an average annual rate of almost 17% over the last 10 years and 19% over the last 5 years. The comparable increases for the TD Bank are 14% and 13.5% and for the Bank of Nova Scotia, almost 17% and 19%. I do not follow the CIBC bank as I feel it is the worse run bank in Canada.

I would not buy a bank at the present time for capital gains, because I do not know when this current financial crisis will be over with. If I did not have so much in bank stocks already, I would a bank for the dividend income over the long term.

What does these dividend increases mean to you? I have the Bank of Montreal. In 1987, my dividend income from this stock was $156 quarterly. Five years ago in 2003, my quarterly dividend was $411.84. My last quarterly dividend in February 2008 was $873.60.

The energy section of the stock market, especially oil is making lots of money at present. But some day the price of oil will fall, or they will replace oil with something else. Changes like this happen very quickly. We talk about change for years and we wait and wait, then, all of a sudden it happens. Everything changes.

I would rather buy a bank than an oil company. Our banks will make money because of the high price of oil. When the price of oil goes down and it will, the banks may falter a bit, but then they will start to make money out of the next big thing. However, any investment in oil will be gone forever. If I buy any resource company, I also have a sell date in mind. I do not think I will have to sell my banks; although, I could be wrong. What I do know is that I would probably have to sell any resource company long before any bank.

So, in the short term, I feel I can make more money from oil and I do have something like 1% resources in my portfolio, just to keep track of resources. But I buy and hold bank stocks for the long term and I do not worry.

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