Bank stocks. Many investors shudder simply at the mention of them.
That’s understandable, considering the crimes they committed against the markets and, in turn, the losses they handed unsuspecting investors.
By no means am I about to suggest that bank stocks have served their time and repaid their debt to society.
I simply want to caution you against labeling all bank stocks as offenders. Doing so means incarcerating the good with the downright ugly.
You see, not all bank stocks required a government bailout. Not all bank stocks slashed their dividends through the financial crisis. Not all bank stocks are being slowly nursed back to health.
So, not all bank stocks should be avoided.
With that in mind, I have six bank stocks for you to consider today. Forget being on the mend – they’re the world’s soundest banks, according to the World Economic Forum. So much so, all but one of them increased their dividends twice in the last year.
In addition to sporting above-average (and growing) yields, they also offer us an opportunity for double-digit capital appreciation to boot.
What else could we ask for?
In late 2011, I predicted the “Big Six” – Canada’s six-largest banks – would be the best dividend stocks for 2012. I even singled out Royal Bank of Canada (NYSE: RY) as the best bet for investors with limited capital.
So far, so good.
Including dividends, Canadian bank stocks are up an average of 10.3% in 2012. And Royal Bank tops the list with a total return of 13.2%.
Don’t let the strong performance fool you, though. Plenty more upside remains, especially in light of the latest operating results.
Take Royal Bank, for instance. It reported profits of C$1.31 per share, compared to expectations of C$1.18. Or Canadian Imperial Bank of Commerce (NYSE: CM), which beat profit estimates by C$0.10 per share.
As Bloomberg reports, Canada’s banks “surprised the financial community last week with better-than-expected profit reports and simultaneous dividend enrichments.”
That’s an understatement… Wall Street remains clueless to the strong fundamentals and, in turn, the strong profit potential Canadian Bank stocks currently offer investors.
As you can see in the table above, the average stock is trading 17.6% below its five-year average price-to-earnings ratio. Given the latest results, it’s not unreasonable to expect each stock to trade back inline with its average valuation.
What’s more, the average yield checks-in at 4.2%, which is double the average for U.S. bank stocks. There’s no doubt the dividends are safe, either, given the conservative dividend payout ratios.
And remember, we can easily (and safely) boost these yields by writing covered calls against each stock.
Bottom line: The volatility in the market continues to put a premium on safety, reliability and increased income. Despite being written off by most investors because of their guilt by association, that’s precisely what Canadian bank stocks offer.
Practically speaking, I suggest you spread your bets evenly among all six stocks, creating a mini-portfolio of Canadian bank stocks. Doing so will further reduce your downside risk. Don’t wait too long, though. The next round of dividend payments will start being paid to shareholders of record as of September 27.
For those of you who don’t have that much capital to spread around, bet on Royal Bank.
As John Aiken of Barclays plc (NYSE: BCS) said, “Royal reported one of the strongest quarters of its peers reported to date, leveraging the strength of its domestic retail platform.”
In other words, it’s the biggest and the best of breed.
Safe (and high-yield) investing,