Bank stocks in the USA have been suspect ever since they led us into the financial crisis with their predatory lending practices. However, right next door in Canada, the banks have followed more conservative practices and several are ideal long term investment opportunities. A common practice, among Canadians, is investing in Canadian banks when their stock price falls, dividend percentage rises, and P/E ratio drops. The three Canadian banks we have in mind are these.
Toronto Dominion (TD)
Royal Bank of Canada (RY)
These are the three largest Canadian banks.
New banks are rare in Canada because the regulatory hurdles are so difficult to go over. This also makes Canadian banks, as a group, safer than U.S. banks. In the last century, while tens of thousands of U.S. banks have failed, only three Canadian banks have gone under! Of all the Canadian banks, Toronto Dominion is considered the safest.
Canadian Bank Stocks
The three Canadian bank stocks we have in mind are all dividend stocks. While you may think that these stocks are not great growth opportunities, that is not correct. This graph from Seeking Alpha shows investment portfolio returns for these three banks going back twenty-three years.
Not only are these bank stocks safe investments due to strict Canadian banking regulations but investing in Canadian banks can be very profitable as well.
Investing in Toronto Dominion Bank (TD)
Toronto Dominion was formed by the merger of Dominion Bank and Toronto Bank in 1955. Those banks dated back to 1869 land 1855 respectively. Today TD is the largest Canadian bank by total assets, one of the top ten North American banks, and the 26th largest bank in the world. Over the last two decades, the bank stock has gone from the $2.50 range to the $75 range and its current dividend yield is 3.89%.
Investing in Royal Bank of Canada (RY)
Royal Bank of Canada is the largest in the country by market capitalization and is always around the fiftieth largest bank in the world in yearly ratings. RBC was founded in 1864. Two decades ago this bank stock traded in the $6.60 range and today trades at $105. Its stock has a dividend yield of 3.84%.
Investing in Scotia Bank
The Bank of Nova Scotia was founded in 1832 and operates under the name of Scotia Bank. It is the third largest bank by deposits and market capitalization. Two decades ago this stock traded at about $10 a share and today it trades at around $55. Its dividend yield is 4.77%.
How Canadians Invest in Canadian Bank Stocks
Many savvy Canadian investors have the same preferred length of ownership as Warren Buffett, which is forever. They simply wait until the bank stock price slips a little and then buy a little more. The approach has served many Canadian investors very well for many years.
Seeking Alpha touches on this subject in an article about Canadian dividend stocks.
It’s a strategy that many Canadians employ with the big Canadian banks – buy the worst performer. Wash and repeat.
I took that approach at times with my Canadian banks and my other holdings.
We might see an immediate and more generous income boost and the potential for a greater long term total return boost.
When we have a group of quality holdings we might use that value hunting approach as a consistent strategy.
The author goes on to explain his approach of using P/E ratio, stock price, and dividend yield as guides for when to buy more of these bank stocks.
Timing Canadian Bank Stock Purchases
We have written about the perils of buying cheap stocks recently in our article about choosing undervalued investments. The risk of buying a stock when it is down is when the stock price is down for a good reason and will likely fall even more. Investing in Canadian banks helps reduce this risk as the banks are highly regulated and in the last century only 3 have failed, compared to tens of thousands in the USA. Thus, these stocks can be seen as slow and steady growth stocks with a cyclical component. The trick for maximizing profits with these stocks is to buy when their stock prices are down and when their intrinsic stock value is still strong.
Dollar Cost Averaging Canadian Bank Stock Purchases
If you are not interested in constantly checking stock prices on even a few Canadian bank stocks, consider using dollar cost averaging for these investments. Investopedia defines dollar cost averaging as follows:
Dollar-Cost Averaging is a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset’s price.
Because you will purchase fewer shares of these stocks when the price is high and more shares when the price is low, dollar cost averaging gives some of the same benefit as timing your Canadian bank stock purchases based on price, dividend yield, and P/E ratio.
Intrinsic Stock Value Calculation of Canadian Bank Stocks
Our belief is that every time before you buy a stock you should calculate its intrinsic stock value. That holds true for the three large Canadian banks we reference in this article. However, these are really stable investments that really do let you sleep soundly at night. As such, a yearly review of your portfolio of these investments is a good idea. Every five years is probably too long to wait. And, if you keep evaluating Toronto Dominion, Royal Bank of Canada, and Scotia Bank every month, you are wasting your time.
Investing in Canadian Banks with Dividend Reinvestment Plans
All three of the Canadian banks we looked at have dividend reinvestment plans. Using these plans during your working years is a great way to simulate the dollar cost averaging approach. Taking the dividend checks during retirement is a great way to reward yourself for investing in these safe, solid, and secure Canadian banks over the years.