If you’re after safe, income-producing investments, you need to listen up…
A new opportunity is materializing just north of our border. Specifically, with Canadian bank stocks.
In the last week, Canada’s “Big Six” – its largest banks, which control roughly 90% of the nation’s deposits – bounced squarely off of their 52-week lows.
A bottom appears to be forming, after months of steady declines. If the trend continues, we could easily book double-digit gains from capital appreciation. In excess of 30%, in some cases.
And at the same time, pocket reliable dividend yields of 4% to 5.3%, which is double the going rate for 10-year U.S. and Canadian government bonds.
In this volatile market – and zero-yield world – I’m convinced this is too good an opportunity to pass up. Here are all the details…
All Financial Stocks Were Not Created Equal
Most investors won’t go near U.S. bank stocks right now. I don’t blame them. Most U.S. banks are still working off their toxic real estate debt. Not to mention, they don’t yield squat.
You’ll recall, during the throes of the financial crisis, U.S. financial stocks slashed their dividends to pennies per share each quarter. That included some of the largest banks, like JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC).
All told, financial stocks in the S&P 500 index went from paying out $51 billion in dividends in 2007 to just $19 billion last year. Talk about a disaster for the retirees and conservative investors who had been counting on them for income.
What few investors realize, though, is the same thing didn’t happen in Canada.
As my colleague, Karim Rahemtulla, pointed out last week, “Canada’s banks are the strongest in North America.” Why? Because they embrace conservative lending practices, even while other banks around the world do not.
Leading up to the financial crisis, Canadian banks didn’t overinvest in risky U.S. real estate assets. And they didn’t load up on collateralized debt obligations of every size and flavor.
As a result, not a single major Canadian bank required a government bailout.
More importantly to us, not a single one of the Big Six cut their dividends through the financial crisis. They kept paying shareholders right on through the storm. In the last year, five out of the six even increased their annual dividends.
We should covet such safety, reliability and increased income. Especially now…
As the Euro Crumbles…
Ever since May, the world’s financial markets have been struggling with the debt crisis in Europe. In the process, investors have been unloading financial stocks indiscriminately. A “sell first, ask questions later” type of approach.
Even conservative Canadian bank stocks have been hit. Take a look at the table below and you’ll notice how far each has fallen off its 52-week high.
As a result, Canadian banks stocks are now trading at historically cheap valuations. Ones we haven’t seen since the depths of the financial crisis.
But the situation is completely unwarranted. Conditions are nowhere near as bad as they were in 2008.
As Tony Demarin, Chief Investment Officer at BCV Asset Management, says, “Canadian lenders do not have unreasonable exposure to U.S. bonds or troubled European debt.”
Translation: Thanks to a strong domestic economy, and a government with stable finances, Canadian banks are going to keep generating solid profits. And because earnings ultimately drive shares prices, it’s only a matter of time before Canadian bank stocks rebound.
I expect the rebound to be sizeable, too.
If Canadian banks stocks simply trade back in-line with their five-year average price-to-earnings ratios, we’re talking capital gains of up to 38%. Don’t forget, we’ll also get paid an above-average yield while we wait.
Bottom line: I’m keeping a close eye on the price action in Canadian banks stocks. And you should, too.
Since last Friday, they’re up about 5% to 7%. Another 3% to 5% move to the upside and all of them will be trading above their 50-day moving averages. And that’s a harbinger of higher prices ahead and, in my opinion, an ideal entry point.
Ahead of the tape,