Canadian “Bank-in” for Delicious Yield and Great Value


It is no secret that US blue-chip dividend paying stocks are trading at extremely high valuations relative to historical norms.  Interest rates remain at all-time lows, and investors hungry for yield have turned to blue-chip dividend growth stocks in order to satisfy their appetites.  For the past seven years or so that strategy has worked out quite well on both a capital appreciation and dividend income growth basis.  Seven years is a long time, and the longer that the bull market in blue-chip dividend growth stocks runs, the more complacency it breeds.

Complacency leads to overconfidence, and in my opinion, for investors there is only one thing more dangerous than greed.  That, of course, is fear.  Complacency takes time to develop until it eventually turns into greed.  However, since fear is a much more powerful emotion, it can grab hold of investors almost immediately.  Succinctly stated, greed is fragile while fear is potent.

Warning: You Make Your Money on the Buy Side

This is critically important, because if you are lulled into complacency by a long bull market and suddenly a bear market appears, confidence is shattered and panic sets in.  As a result, it is quite common for investors to hold on too long during a bull market and then panic sell as prices fall below intrinsic value when the inevitable bear market comes.  This simply defines the classic buy high- sell low mentality or trap that many investors fall into.

Investor psychologists have asserted that investors feel the pain of loss two and a half times greater than they do the pleasure of gain.  Therefore, we are often too patient when the bull is running and too impatient when the bear attacks.  Investors should consciously keep this reality in the forefront of their minds – all bull markets end with a bear market – and vice versa.

However, I want to be crystal clear about one thing.  What I am warning about is not holding onto stocks too long during a bull market.  This is not a bad practice if the stocks were purchased at a sound valuation in the first place.  Instead, my warning is referencing paying too high a valuation for stocks in the late innings of the bull market.  Paying too much for even the best companies will rarely lead to acceptable long-term returns.  Paying too high a value at original purchase assumes too much risk with too little result in the longer run.

I believe it is an irrefutable and absolute fact that common stock investors make their money on the buy side.  When you adhere to the discipline of only purchasing a common stock (no matter how strong the company) when fair valuation is manifest, your strategy is prudent and your long-term returns will be greater with less risk taken.  Furthermore, when you follow a prudent valuation oriented investing strategy at initial purchase, you don’t have to worry too much about the inevitable bear market coming along.

There is a logical reason why I believe investors should not be fearful of a bear market, assuming they purchased great businesses at sound valuations in the first place.  Historically, bull markets have lasted approximately 3 ½ times longer than bear markets.  Remember what I said earlier, fear is a much stronger, and therefore, more dangerous emotion than greed.

Consequently, I believe that many investors subconsciously react stronger to bear markets than they do bull markets.  But in reality, bear markets tend to be rather short in duration compared to bull markets. This is the primary reason why I believe it is rational to hold on to attractively purchased stocks through bear markets.  The following slide courtesy of Mackenzie Investments clearly illustrates the comparative duration of bull markets versus bear markets:

If Most US-Based Blue-Chip Dividend Growth Stocks Are Overvalued, What Can I Do?

For starters, you can consider that it is a market of stocks and not a stock market.  Therefore, you can look for pockets of value within an otherwise overheated market.  With my last two articles found here, and part 2 found here I highlighted several dividend growth stocks in the US market that I considered attractively valued for new money to invest in.  On the other hand, the US market is not the only market out there.  With this article, I am going to look to the Toronto Stock Exchange of our Canadian neighbors to the North for attractively valued dividend growth stocks.  However, I am going to limit my first examination of Toronto Stock Exchange selections to the Canadian banking industry.  My primary goal is to identify not only attractively valued high yielding Canadian stocks, I am also concerned with prudence and reliability.

The Toronto Stock Exchange is quite different than the major US stock exchanges.  A recent report on international investing in “the balance” described the makeup of the Toronto Stock Exchange as follows:

“The Toronto Stock Exchange consisted of over 1,500 companies, as of 2016, worth a total of $2.8 trillion in market capitalization. While the majority of these companies are based in Ontario (52%), a substantial portion of the exchange’s market capitalization also comes from Alberta (25%), due to the region’s rich natural resources – namely, oil and gas in the oil sands.

The exchange’s breakdown of sectors by market capitalization shows a skew towards financial services (38%), energy (20%) and materials (10%), while industrials and consumer discretionary round out the top five sectors. Many of these companies consist of so-called junior mining companies focused on developing natural resources.”

Therefore, since the majority of Toronto Stock Exchange listed companies are skewed towards financial services, I chose to cover this sector initially.  The following portfolio review looks at the colloquially named “Big Five” largest banks that dominate the Canadian banking industry.  The review is produced with TSX listings and is in alphabetical order. It reports each company’s credit rating, current P/E ratio, earnings yield, dividend yield and market cap.

Important Considerations Before Investing in Canadian Banks

If you are a Canadian citizen, then I would argue that investing in any of the “Big Five” Canadian banks is a rather straightforward decision.  There are many institutions that consider Canadian banks some of the soundest banks in the world.  Later, when we look at their individual historical operating histories, that statement will be validated.

However, if you are a US citizen, the issue becomes slightly more complicated.  All of the “Big Five” Canadian banks are cross listed (interlisted) on the NYSE and the TSX.  However, according to Charles Schwab and Company, US and Canadian shares are not fungible.  Therefore, investing in a cross-listed stock requires that you hold the stock in US dollars and receive US dollar denominated dividends.  Consequently, currency exchange rates will come into play.  Moreover, for US citizens, there will be times when the exchange rate goes against you, and times when the exchange rate benefits you.

Additionally, there are no tax implications for buying cross-listed stocks because you get a tax credit against your US tax bill.  For example, Fidelity explains the rules that apply to the Canadian withholding tax for their firm as follows:

“The Canada Revenue Agency (CRA) allows Fidelity to automatically apply favorable withholding

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