What pessimists may say about top Canadian bank stocks

We’ve recommended buying the five top Canadian bank stocks since the 1970s, but not everyone has agreed with that advice.

Canadian banks have gone through periodic and sometimes lengthy slumps, like any other stock group. They occasionally make costly management errors. On rare occasions, they have suffered from adverse regulatory decisions.

This is what pessimistic investors might say about top Canadian bank investments. But because these stocks have grown, paid high dividends and have generally been available at highly attractive prices, they’ve provided well-above average investment returns for decades.

Investor worry and the banks

Some investors fear the banks will lose out to “fintech” (upstart financial technologies, comparable perhaps to Uber or AirBnB). 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.

On the whole, investors have underestimated top Canadian bank investments for as long as I’ve been in the investment business. As a result, these stocks have often traded at attractive share prices. Because they were growing, and cheaper in many respects than other stocks, they gave conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and records; low-to-moderate ratios of per share price-to-earnings; and above-average long-term capital gains.

Look for top Canadian bank stocks with consistent dividends

One of the best ways of picking a quality stock is to look for banks that have been paying dividends for at least 5 to 10 years. Dividends are cash outlays that an unsuccessful bank could never produce. A history of dividend payments is one trait that all the best bank dividend stocks have.

Bank stock dividends are a sign of investment quality and can grow

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 their dividends upward—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.

Bank of Nova Scotia is a top Canadian bank stock

Bank of Nova Scotia is Canada’s third-largest bank.

Timely acquisitions have played a large role in Bank of Nova Scotia’s growth. One of its most prominent acquisitions was ING Direct, a specialist in no-fee banking services.

Scotiabank is a top pick for anyone who asks which Canadian bank is best to invest in because it continues to expand in regions like Latin America, South America and Asia. There’s still room for the bank to expand further throughout Latin America and Asia, especially as their growing middle classes look for stable deposit and consumer-lending services.

Hang on to your Canadian bank stocks

We’ve long recommended that most Canadian investors should own two or more of the Big Five Canadian bank stocks: Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s mainly because of their importance to Canada’s economy.

Banks remain key lower-risk investments for a portfolio. As well, the big five Canadian bank stocks 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 forecasts on the banks’ prospects from some in the business media. They trade at attractive multiples to earnings and continue to raise their dividends.

Are you pessimistic when it comes to top Canadian bank investments? Share your opinion and experience with us in the comments.

 Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article has been republished on the Hub with permission. You can also find it as it appeared on TSINetwork here.