Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

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Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by jgodcom »

Canada is now officially in recession but the financial sector is doing relatively well. I’m looking into bank stocks for passive dividends income for the long haul.

So here you go. I picked 5 stocks among banks that I consider to be good: http://hellomoney.co/portfolio/5be000-c ... ank-stocks

These 5 stocks have average yield of 3.57%, and relatively high 5Y/10Y/15Y returns. I am leaning toward picking up NA and CM. What are your thoughts and opinions?

NA.TO

* PER 9x
* Growth 8%
* Dividend Yield 4.9%

CM.TO

* PER 11x
* Growth 5%
* Dividend Yield 4.3%
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by SQRT »

Those are the only two I don't own. CM has changed course recently and I think if they can execute (this would be a first) they might do pretty well. NA has traditionally relied more on wholesale banking which is more risky and less profitable. The traditional wisdom continues to favour TD and RY, esp TD.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by BRIAN5000 »

Code: Select all

   	COST 	Nov-09	BUY YD
BMO 34.60	$76.41	9.5%
BNS 27.22	$60.99	10.3%
CM	53.28	$99.50	8.4%
TD	17.90	$54.44	11.4%
NA	16.62	$43.72	12.5%
RY	44.22	$76.06	7.1%
Longterm accumulation TD started in 1995 added on dips to whatever looked cheapest.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by StuBee »

Yes sir! RY is a winner! Bought it for 12.40$ My yield on cost is... 25%!!! Very hard to go wrong with our banks. I also own BMO but only since 2007 so my yield on cost is not nearly as spectacular (about 6%).

To the OP. Yes, by all means, buy the banks. You can also include BNS (which you have failed to mention). They are all good. RY is the biggest, NA is the smallest, and CM (it appears to me) tends to hurt itself. Buy them when they are in the lower half of their 52 week range and then ignore. I cannot recommend any one of them specifically though I would be inclined to begin with one of the bigger three. Evidently I am biased towards RY...
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by adrian2 »

I own CM (my first stock purchase) and TD.
Happy with both.

Coincidentally (or maybe not) they are the banks I do business with:
CM - from two decades ago, first bank account after setting foot in Canada. Recently moved over to their PC Financial division.
TD - my business account, as well as business and personal investments.
No bank accounts ever at the other banks (except for ING Direct -> Tangerine -> now part of BNS).
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by Peculiar_Investor »

Not directly a reply to the OP questions, but related to the subject at hand. The Financial Times just posted the first of a three part article, Beyond Banking: under attack on all sides | The Financial Times that contains some insights and thought provoking ideas about trends in the banking industry. While Canadian banks are not directly mentioned, the trends and attack vectors being covered would definitely apply to Canadian banks.
FT wrote:With the aftershocks of 2008 still hitting the global economy — and central banks in the US and UK shying away from normalising ultra-accommodative monetary policies — banks, formerly seen as the powerhouses of growth, are under pressure on every side. Regulation is piling up. Competitors are stealing business. And many lenders are shrinking fast. Is banking in terminal decline?

It is certainly in turmoil. Hit by challenging markets and onerous post-crisis regulation, bank profitability has been squeezed hard.
I think there is definitely evidence of the Canadian bank profitability being squeezed based on recent quarterly reports and press releases from the banks. Canadian banks probably have higher barriers to entry and are more deeply ingrained in the Canadian fabric, but that doesn't make them immune to global forces. When analyzing them for potential investment, I'm definitely taking past performance with a larger grain of salt these days as the environment they operate in has and will continue to change.

While there isn't much to suggest that their dividends will be impacted going forward and thus they'll provide a foundation for Canadian dividend investors, I'd caution that dividend growth may be impacted by these trends, as could their stock prices.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by Shakespeare »

If we assume no P/E change, 4% dividend, 1.3% inflation, and 1.2% GDP growth, we get 6.5% going forward if they hold their markets. Not as good as before, but not unreasonable.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by kcowan »

I consider the banks to be solid holdings in the dividend world. Their future performance is bond to be adversely impacted by the turndown in the O&G Sector. They will also be impacted by the slowing of growth in the residential property sector.

I was very young when they consolidated. My relatives worked as middle managers at Scotia. It always seemed to be aggressive at going after small business. Several former workmates did their final work at TD, CM and RY. My most positive experience has been with Scotia. I have been fired as a customer by CM and RY.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by Flaccidsteele »

Almost impossible to beat a basket of Canadian banks for the last 40 years.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by AltaRed »

Flaccidsteele wrote:Almost impossible to beat a basket of Canadian banks for the last 40 years.
Past performance does not guarantee future performance. With the financial marketplace getting more and more crowded and slow global growth going forward. I assume only single digit ROE returms in the banks going forward which is perfectly fine of course as a component in one's portfolio. I hold positions in 4 of the banks with no intention of selling any until I need to withdraw capital.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by SQRT »

AltaRed wrote:
Flaccidsteele wrote:Almost impossible to beat a basket of Canadian banks for the last 40 years.
Past performance does not guarantee future performance. With the financial marketplace getting more and more crowded and slow global growth going forward. I assume only single digit ROE returms in the banks going forward which is perfectly fine of course as a component in one's portfolio. I hold positions in 4 of the banks with no intention of selling any until I need to withdraw capital.
Agree with past performance,etc. But you have to admit they have done a pretty good job of managing a changing environment to this point. Single digit ROE's seems pretty pessimistic though. 12% would seem more likely and that assumes things generally don't go very well.

I am very lucky to have worked for one of these banks, loaded up with cheap shares and generally held them to the present. TD has outperformed the TSX by about 2-4% forever. Can it go on? Doubt it. But don't know of anything else that could.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by Peculiar_Investor »

Flaccidsteele wrote:Almost impossible to beat a basket of Canadian banks for the last 40 years.
Particularly if you had a time machine and could go back 40 years ago.

Without the time machine, how did the investor in 1975 know how a basket of Canadian banks would perform over the next 40 years? What if you had picked Royal Trustco for example? By the mid-1980s, Royal Trustco ranked among the 10 largest financial institutions in Canada. By 1993 the stock had gone to zero and the assets were purchased by Royal Bank
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by AltaRed »

SQRT wrote:Agree with past performance,etc. But you have to admit they have done a pretty good job of managing a changing environment to this point. Single digit ROE's seems pretty pessimistic though. 12% would seem more likely and that assumes things generally don't go very well.

I am very lucky to have worked for one of these banks, loaded up with cheap shares and generally held them to the present. TD has outperformed the TSX by about 2-4% forever. Can it go on? Doubt it. But don't know of anything else that could.
Certainly they have been good at adapting to their environment and making the most of their opportunities. But what do they do for an encore? I no longer see double digit returns given the banks have expanded into about as many financial services that exist today in Canada and there are headwinds competing with dozens of others in the International scene.

As P_I said, no one could have guessed that success back in 1975 and which ones necessarily to pick. Who knows whether they would have blown their heads off if they had been allowed to merge and gone global as investment banks Lehman Brothers style. Our government probably has been as responsible for their success (or maybe more so) than the banks themselves. That said, I still see them as the anchor in any portfolio, nothing more, nothing less.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by bpither »

I own TD (largest holding), RY,BNS and BMO. The big banks have an astonishingly long record of consistently paying dividends. Bank of Montreal has been distributing them non-stop since 1829, the longest unbroken record of any Canadian company. Bank of Nova Scotia's streak goes back to 1833, TD's to 1857, CIBC's to 1868 and Royal's to 1870. The last time any of the above cut their dividend was in 1942.

National eliminated their dividend in 1982 but reinstated it a year later.

In a non registered portfolio dividends are tax efficient, and depending on the province the credits make a big difference in what you can keep ...
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by Flaccidsteele »

AltaRed wrote:Past performance does not guarantee future performance.
Of course I've never invested in Canadian banks so I have a bias there.

However, people even said this about investing all my money into the equity market 20 years ago (it seems to be a popular phrase). So I asked, well what is a fellow supposed to do if they have no other skill or ability to create money? 9-5 for 40 years? Empirically that didn't seem to work. Otherwise there would be millions of millionaire 9-5 workers in retirement. So I took my chances. Nobody ever provided a logical alternative.

The books were pretty clear even back in the 90s. If an individual brainlessly invested in the equity market and did nothing but sit on their butt, they would retire very comfortably. And since I didn't know any better, and nobody else gave me a palatable alternative, that's what I figured I had to do.
Peculiar_Investor wrote:Particularly if you had a time machine and could go back 40 years ago.
True. And albeit anecdotally throughout my life I only met 2 people who did this. One was my friend's dad (now passed), and another was an acquaintance. Both were teachers, but bought a basket of bank stocks 40 years ago. I marveled at this, but my parents said the same thing, "Well the information is useless now because we can't go back in time 30 years ago". So what's the solution? Well nobody had one. So then I just said that I want to be the guy who, after 40 years, people will tell me, "Well the information is useless now because we can't go back in time 40 years ago."

A few acquaintances say that about me now. Not about stocks tho. Moreso about the U.S. real estate ("well we can't go back 5 years ago"). Which is true. But the thinking generally ends there. And I just think, 'Keep on with that mindset friend. It'll work out great for you'. :thumbsup:
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by SQRT »

Well people have been touting the banks as good long term investments for at least 15 years. If you didn't believe it you didn't buy them. It wasn't that difficult then as they had demonstrated long term success at that point. Maybe same as today maybe not.
One thing I think I do know is they will either display pretty good growth or they will repo their shares. Banking has been the best business in Canada for quite a while. Where can you get 45% ROE in your main business? Will it continue. Who knows but my money is on them.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by AltaRed »

Just so no one thinks I am knocking the banks, fully 20% of my Canadian equity is in the common shares of 4 Cdn banks.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by kcowan »

ISTR reading a paper about investing in the banks. It concluded that Preferred shares were a bad deal because the return was fixed (in those days for 5 years without rate resets) at 1.5% above the current common dividend yield. It said with history of dividend increases, the yield would exceed the prefs in the 5 years without counting any capital appreciation.

Of course, now rate resets change everything.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by like_to_retire »

kcowan wrote:It concluded that Preferred shares were a bad deal because the return was fixed (in those days for 5 years without rate resets) at 1.5% above the current common dividend yield. It said with history of dividend increases, the yield would exceed the prefs in the 5 years without counting any capital appreciation.
That would be true if the history of dividend increases was guaranteed, but it isn't, so that adds risk along with the extra risk associated with common share dividend cuts. I've heard the argument before and it doesn't hold water.
kcowan wrote:Of course, now rate resets change everything.
For sure. It use to be so simple with straight perpetuals. You knew what your dividend was, and you knew what affected your share price. With resets, it's a bugger. You have to pay attention too much. I don't like it, but I have 65% of my prefs in resets.

For banks I have CM, BMO, NA.

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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by SQRT »

kcowan wrote:ISTR reading a paper about investing in the banks. It concluded that Preferred shares were a bad deal because the return was fixed (in those days for 5 years without rate resets) at 1.5% above the current common dividend yield. It said with history of dividend increases, the yield would exceed the prefs in the 5 years without counting any capital appreciation.

Of course, now rate resets change everything.
Agree. They were bad deals even before the rate reset thing happened. I was in charge of issuing these things and figured that the yield premium was too small compared to the common. Always surprised and relieved when they sold so well. Certainly still the case even more. Never owned a bank pref.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by Thegipper »

Just wondering if Apple, Google, Amazon, etc might provide the big banks with a "Uber" like challenge? I don't underestimate this possibility. A 2004 Blackberry response to the threat could be a big mistake.Past performance might not be that reassuring.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by SQRT »

Thegipper wrote:Just wondering if Apple, Google, Amazon, etc might provide the big banks with a "Uber" like challenge? I don't underestimate this possibility. A 2004 Blackberry response to the threat could be a big mistake.Past performance might not be that reassuring.
Certainly a risk. Mitigating conditions would be -they seem very aware of the challenge (as is the market), have demonstrated excellent management responses in the past, have adequate resources to respond, and very high incentive to do so(very high ROE's). Other than that, who knows.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by BRIAN5000 »

Agree. They were bad deals even before the rate reset thing happened. I was in charge of issuing these things and figured that the yield premium was too small compared to the common. Always surprised and relieved when they sold so well. Certainly still the case even more. Never owned a bank pref.
Have you owned other preferred shares or none at all?
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by SQRT »

BRIAN5000 wrote:
Agree. They were bad deals even before the rate reset thing happened. I was in charge of issuing these things and figured that the yield premium was too small compared to the common. Always surprised and relieved when they sold so well. Certainly still the case even more. Never owned a bank pref.
Have you owned other preferred shares or none at all?
Only really considered the bank issues as I knew the most about them. I figured if they weren't a viable alternative to the common maybe the rest weren't either. But this was probably based on lack of knowledge. Don't have any FI in my portfolio as my pension's npv is about 2/3 of my equity portfolio value, ie 60/40 AA. But prefs aren't really FI anyway. I am rambling,sorry.
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Re: Bank stocks (RY, NA, TD, BMO, CM) - still solid for an income portfolio?

Post by kcowan »

Thegipper wrote:Just wondering if Apple, Google, Amazon, etc might provide the big banks with a "Uber" like challenge? I don't underestimate this possibility. A 2004 Blackberry response to the threat could be a big mistake.Past performance might not be that reassuring.
Where do you think their exposure lies? For example, Paypal has been around for years. Does it threaten or does it aggregate?
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