Sunday, February 17, 2008

profit from canadian financials

Stocks representing the Canadian financial services sector have really been taken down lately in the midst of the U.S. credit crunch and concerns about the weakening U.S. economy's affect on Canada. The Canadian economy has been firing on all cylinders for a few years now, and the market seems to be anticipating a slowdown in activity in Canada due to the weakness of our largest trading partner to the south of us. iShares XFN, an ETF that tracks the Canadian financial sector is down 12% in the last year. So far, in general, there has not been a real drop in earnings growth for these financial services firms, although it is widely expected by investors and by the companies themselves.

A drop in earnings growth has probably been priced into many of these banks, wealth managers and insurance firms, and consequently they are now offering up some pretty hefty yields. The yield is the percentage of your invested dollars that the company pays you annually, as a shareholder. Many of these companies have long histories of dividend increases, which can really benefit a shareholder in the long term, as one recieves an ever-increasing stream of cash. Many of these companies have increased their dividends paid to shareholders at compounded rates in the 7-12% range long term. This type of annual raise really trumps the typical 3-5% raise in employment income that one might expect slaving away at a 9-5.

Where to put your money? If you have a hoard of cash that you won't be needing for at least 3-5 years then why use a saving account where your capital just gets eaten up by inflation, and the income you receive gets taxed accordingly? Dividends from Canadian corporations are taxed less than all other forms of income. The income you'll recieve in the form of dividends from these firms is only half the story, as in the long term you should also garner some capital gains from selling the stocks.

Selected Popular Savings Account Interest Rates in Canada
ING Direct 3.65%
President's Choice Financial 3.75% (balance over $1,000)

Some Selected Canadian Financial Institution Yields on Common Stock
Bank of Montreal (BMO) = 5.2%
Royal Bank of Canada (RY) = 4.0%
Bank of Nova Scotia (BNS) = 3.9%
IGM Financial (IGM) = 4.4%
Great West Lifeco (GWO) = 3.7%


Traciatim said...

You'd think by that list you were avoiding sharp objects? Where's the bank that runs with scissors? :)

MG said...

these are all ripped from my watchlist...

Preet said...

"the bank that runs with scissors"



Dividends4Life said...

I have been immensely impressed with RY and continue to add to my position in it.

Best Wishes,

Susan said...

I've added to RY lately, also hold BNA, BMO, CIBC (sigh). Will just keep holding and holding as my Mum has done for over 40 years. She's weathered storms that she didn't even know she was going through and come out a winner with banks.
I have a feeling that when there starts to be some resolution to the global banking mess, our banks and lifecos may get a good amount of the cash sitting on the sidelines right now.

Canadian Dollars said...

Banks continue to be one of the most high margin businesses in the business. in the long run if you go with a well established banking institution, you should (generally) be fine. Of course we could run into a massive corruption scheme in which one of the banks falls but then that would impact everyone else as well.

Thanks for the post mg. Very informative! Blog said...

Just to let you know Toronto-Dominion and Bank of Nova Scotia and Laurentian Bank have virtually no subprime expose. Hence, they have
been some of the best performing banks this year.

My bank pick for the year was Laurentian Bank, so far it has gone up more than 26% since I listed it on my blog. However I now feel the
move has been over extended in the short term.

Remember , like any company you want to see EPS growth, dividend
growth, High Net Profit Margins, High Return on Equity.

Especially in these roller coaster markets its important to buy quality and spend at least an hour examining the financial reports.

For More Analysis Visit:
A Canadian Financial Blog