It is no longer a secret to any investor, the best banks in the world are found in Canada. We have only 6 “big banks” and one of them (National Bank; TSE: NA) is established mostly in only one province (therefore really a regional bank). This interesting banking model established a long time ago is controlled by the tight federal laws. This ensures that big banks don’t take huge risks and therefore, they maintain solid balance sheets.
As of October 1st , the average dividend yield offered by Canadian banks is 3.97%:
Canadian Bank Ticker Price Dividend Yield
Royal Bank (RBC) RY $53.60 3.70%
TD Bank TD $73.58 3.30%
Bank of Nova Scotia BNS $54.26 3.60%
CIBC CM $74.26 4.70%
Bank of Montreal (BMO) BMO $59.12 4.70%
National Bank NA $64.23 3.80%
Taking into consideration that all banks posts profits (even in 2008) and they have a low payout dividend ratio, Canadian banks are definitely about to increase their dividend in 2011:
Comfort from Basel III; Dividend increase to come
Basel III will take 5 to 10 years to be implemented by banks around the world but Canadian banks will likely meet the requirements within the next 2 years. They already have a high liquidity ratio and solid balance sheet.
On September 13th, many websites reported the eventual impact of Basel III on Canadian Banks. Seeking Alpha posted an interesting article from David Berman from The Globe Investor called “Basel and Canadian Bank Dividends”. In this article Berman explains why Canadian banks should raise their dividend payouts. Following this announcement, all banks stock went up slightly (by 1 to 2%) on the very same day.
The hunt for yield is on; dividends to the rescue!
While I will discuss this in a further post, I think that the hunt for yield and monthly income will increase in 2011. Why? Simply because bonds are paying ridiculous rates and investors fear to see their market values drop with rising interest rates. Because GICs and CDs also offer a yield a that barely covers inflation and on top of that, they are non-redeemable before maturity date.
So most conservative investors will start looking towards dividend stocks as they won’t have many other options left. And if you are looking to invest into some solid Blue Chips, Canadian banks seem to be the way to go.
Canadian Stocks in a US portfolio?
If you are a US investor, you may think that it isn’t worth investing in another country’s market. However, the economic situation offers you the opportunity of a lifetime. Canadian banks show a great dividend yield compared to US Financials along with a solid balance sheet and the expectation of a dividend growth. Currency rate? This may be the only factor to take into consideration. While we almost reached parity between the US and CDN dollar, most economists see the Looney’s real value at $0.90 to $0.95. Therefore, you may lose a few % when you convert back into US money.
On the other hand, the expected capital gains along with high dividend yield should definitely compensate for the currency fluctuation. In addition to this, the constant chase for resources should maintain the CDN dollar at a high level for several years in my opinion.
Who’s going to be the first bank to raise its dividend?
THAT is the question! In my opinion, I think that National Bank (NA) will be the first one to increase its dividend. We heard rumors of dividend hikes for the National Bank and TD Bank. The good news about this dividend hike situation is that all the big 6 follow each other. Therefore, if National Bank or TD starts the dividend increase game early in 2011, the others will also up their dividend payout a few months after.
Have you any bets on who’s going to raise its dividend first?
Disclaimer: I own National Bank stocks (NA).
FYI, for US investors, most major Canadian banks also trade on the NYSE US exchange. So you can avoid the concern of holding Canadian currencies. National Bank may be the only one that doesn’t.
I have to say though that National Bank may be present mostly in Quebec, it is “La Caisse Populaire” that really owns the market share in Quebec. I have heard at times that National Bank looks prime for a take over … Only speculation though.
@Passive Income Earner,
Good point, totally forgot about it. I guess they would be a very good addition to any American investors then!
National Bank and Caisse Pop are almost equal in term of market shares in Quebec. NA has always been in the middle of speculation because of its small size compared to other banks and its “impenetrable” niche (Quebec). However, federal laws will prevent any fusion for a while…
No bet’s here on who will be the first to raise dividends. However, I think you are right on about investing in Canadian banks. I am actually bullish about Canadian companies in general when comparing them to the US.
US banks are not far behind with dividend rises likely as Fed eases restriction. Money times are back courtesy the US taxpayer.