Investing in Canadian banks is a route to dividends with lower risk

Do you want more dividends? If so, investing in Canadian banks may be for you

Investing in Canadian banks offers a key lower-risk investment for any portfolio. As well, the big five Canadian bank all have long histories of annual dividend increases.

We believe Canadian bank stocks are still well positioned to weather downturns in the Canadian economy, contrary to pessimistic growth forecasts from some in the business media. These stocks trade at attractive multiples to earnings and continue to raise their dividends.

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Investing in Canadian banks offers dividends

Because their earnings were growing and their shares were cheaper in many respects than other stocks, Canadian banks have long offered conservative Canadian investors several pluses. They include steady dividend yields and above-average long-term capital gains.

That performance is likely to continue in the coming decades. That’s despite the increasing worry of some investors. They fear the banks will lose out to “fintech” (upstart financial technologies). Or they wonder if the banks will get caught unawares when interest rates make their long-awaited upward move.

Our view is that the banks had a long time to prepare for the inevitable rise in interest rates, and the inevitable coming of fintech competition. In fact, they will probably wind up prospering in fintech, if not dominating it, as they did in stock brokerage, insurance and other financial areas that they have entered in the past few decades.

Dividends are a sign of investment quality while investing in Canadian banks

Some good banks reinvest a major part of their profits instead of paying dividends. But failing banks hardly ever pay dividends. So, if you only buy bank stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst banks.

Banks like to ratchet up their dividends—hold them steady in a bad year, raise them in a good one. That also provides a hedge against inflation.

For a true measure of stability, focus on banks that have maintained or raised their dividends during economic and stock market downturns. These banks leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth. Top Canadian bank stocks are well known for their financial stability in the face of economic downturns.

A tip for investing in Canadian banks: Don’t limit yourself

Simply put, a well-constructed stock portfolio will make your life easier and maximize your gains.

When you try to pick a handful of stocks that will all beat the market, you are asking a lot of yourself. No one, not even people that devote their entire lives to it, has ever been able to consistently pick stock-market winners over long periods.

On the other hand, it’s relatively easy to acquire a balanced, diversified portfolio of mainly high-quality, dividend-paying stocks, spread out across most if not all of the five main economic sectors—Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer.

If you diversify, you improve your chances of making money over long periods, no matter what happens in the market.

By spreading your holdings out across most if not all the five sectors, you can avoid overloading yourself with stocks that are about to slump because of industry conditions or a change in investor fashion. By diversifying across the sectors, you increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Canadian bank dividends can be a big part of long-term investment gains

We think that Canadian dividend stocks rarely get the respect they deserve from investors. But in a time of low interest rates, savvy investors pay more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price).

Dividend-paying companies are responding by doing their best to maintain, or even increase their payouts.

If you stick with top-quality, high-dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Have Canadian media reports on the pressure bank employees feel to upsell affected your investment interest?


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