Canadian investors suffer from a ‘terrible’ home bias. That is we are waaaaaay overweight our Canadian stocks compared to US and other International stock markets. Well, so goes the theory. Canadian ETF investors are more ‘sensible’ and have a near equal allocation to Canadian and US markets with a more modest but meaningful allocation to developed and developing market stocks. Stock pickers have been known to invest heavily in the Canadian monopoly of big banks. Investing in Canadian banks might soon pay some dividends with the release of earnings and the release of loan loss provisions.
In August of 2020 I wrote that the Canadian banks were the cheapest they had been in 20 years. And from January, here’s a post I wrote for Million Dollar Journey, the juicy dividends were ripe for the picking. Year to date the big banks have more than doubled up on the returns of the TSX composite. Over a 1-year period the beat is even more exaggerated.
The bigger the better dividends?
Companies that pay big dividends are back in style, and perhaps the bigger the better if they are members of the TSX 60. Yesterday I posted on the Beat the TSX portfolio that holds the top 10 yielding stocks in the TSX 60. In the BTSX for 2021 you find 2 banks – CIBC and Scotiabank.
And a few readers asked about the MER for the BTSX. Keep in mind, that is a hypothetical ticker. There is no ETF. You can go out and buy those 10 stocks if you like the approach. If you were at Wealthsimple Trade your MER would be zero. Of course you’ll have trading costs at most discount brokerages. Wealthsimple Trade is a trading app that allows for free trades of Canadian stocks. You’d pay a currency conversion charge on both sides of trades if you purchased U.S. stocks.
Canadian banks earning season.
This should be another fun week in the markets, and the Canadian banks might take centre stage for Canadian investors. BMO kicks offs the banks earnings season on Wednesday. And there are many positive tailwinds for the Canadian banks.
Canadian banks might get a boost with the release of up to $8 billion in reserves. The subhead for that Financial Post article offered …
Reserve releases, the most visible confirmation of the recovery, could be the next catalyst for bank stocks.
And also from that FP post …
Banks set aside loan loss provisions. If it’s estimated that an amount of those provisions are not required, they are released to be used for such things as pay dividends, pay down debt or buy back shares. All are positive events for share prices and putting money in your pocket by way of bigger dividends.
In periods of economic uncertainty, the banks set aside additional reserves based on their estimates of future credit losses, reducing earnings and capital. However, the banks have a history of being conservative, setting aside more than what they ultimately need. It is likely the banks were similarly conservative this cycle. Aided by substantial fiscal support and loan deferrals, the banks have likely set aside a level of reserves that will materially exceed what is ultimately needed to absorb actual losses. As the economy reopens, one can expect the banks to release these “excess” reserves back through earnings and into capital.
Financial Post
Also in the Financial Post …
Canadian bank earnings set to beat rising estimates on deal fees, reserve releases
Many analysts have raised their price targets.
Analysts expect average core earnings per share for the top six lenders in the three months through April to more than double from a year ago, when they set aside nearly $11 billion (US$9.1 billion) to cover potential bad loans. That would be 9.5 per cent lower from the previous quarter, largely due to fewer days in the period.
And of course there are risk. Governments and citizens alike have an appetite for debt.
But Belisle warned that as government support fades and insolvencies “normalize,” the loan impairments that have so far been held at bay are likely to rise, although these would likely be covered by existing reserves.
“The second half is when a lot of things will happen, when we will start seeing impaired loans spiking,” he said.
But this could be offset by improved loan growth as pandemic-driven lockdowns end, and margins recover, he added.
I hope it is a successful period of reporting that invites even higher stock prices. I will do some modest rebalancing moving profits to my ‘commodities stuff’ and bitcoin.
Investing in Canadian banks might offer an opportunity to rebalance and shore up any portfolio holes.
I’m sure that the Canadian bank reporting will be part of my MoneySense weekly.
Stay tuned.
The Sunday Reads.
GenYMoney will bat lead off this Sunday with passive income vs active income. Good post. I am in that camp of creating income streams from many sources. When writing this post I discovered that I already have several ‘jobs’, though some of those are non-paying and that’s all part of the semi-retirement life plan.
Finding purpose in retirement.
Here’s the financial freedom update on Million Dollar Journey. The all-time high edition, of course. Inspiring …
On the topic of dividends and keeping score, here’s the April update from Bob at Tawcan.
A topic du jour with the threat of inflation and higher rates, how bond investors can minimize the risk of rising rates from Jonathan Chevreau.
On My Own Advisor it’s the Weekend Reads, out of control real estate edition. Yes, that was all part of our retirement funding plan Mark. #downsize 🙂
At Savvy New Canadians, Enoch asks … How much money do you need to have saved in your 20s, 30s, 40s or 50s if you want to retire comfortably?
On Reverse The Crush, find someone other than David Ramsey for investment advice.
This is a Globe and Mail paywall post, but an investment thesis worth considering. Why Canadian utility stocks look like a smart bet on EVs and a new age of electrification. Those electric vehicles might be plugging in some bigger dividends and growth for Canadian dividend investors.
Independent renewable energy power producers have also been popular among investors betting on a greener future, in which more of the world’s energy supply will come from wind and solar farms.
But the low-risk regulated utility is ultimately where electric vehicles get their juice, putting utilities in the middle of a broader electrification trend that will see businesses and households draw more electricity from a grid fed by cleaner energy sources.
That adds an intriguing growth component to a regulated sector best known for stability and dividends.
“Electrification is a big part of our corporate strategy, which is to plan, design and build a grid for the future,” said Mark Poweska, chief executive officer at Toronto-based Hydro One Ltd.
Investors can grab the sector with BMO’s equal weight utilities ETF. If you want to juice the income you can look to the BMO covered call utilities offering.
I like that idea, though the index has already enjoyed an incredible run. I will explore adding in utilities, they’ll go nice with the pipelines and energy stocks. Investments also include the clean tech EV theme by way of the Amplify BATT ETF.
In The Sunday Investor newsletter, a look at inflation and under the hood of the U.S. CPI, the consumer price index.
And in podcast-land, Maple Money chats blockchains, cryptocurrency and NFTs with Courtney Stephen.
That’s it for this week. Have a great long weekend and keep safe.
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Dale
Great read, Dale! Thanks for sharing. I’m looking forward to the bank earnings this week. It was shocking to see how low the banks went last year. I was a buyer of $RY and $CM on the dips. However, I did sell my $CM position recently. As much as I like them, my portfolio was over exposed to Canadian banks. Thanks for the great reads and for including me!