Is there room for bank dividends to keep on growing?
Yes, there is always room for banks to increase their earnings and, in turn, their dividends. Banks can raise account fees, bump up interest rates on mortgages and lines of credit and sell more of their profitable investing products.
But we're living in a slower-growth world, and that has implications for people who hold bank shares for the dividends. Expect continued dividend growth, but at a slower pace than in the past.
In fact, dividend growth at the big banks has already slowed from the pace prior to the global financial crisis. Royal Bank of Canada started 2007 with a dividend of 40 cents per quarter and ended the year at 50 cents after a pair of dividend hikes. The bank's two dividend increases in 2015 took the payout from 75 cents to 79 cents. This is the new normal for bank-dividend growth.
What international markets are looking good for the coming year?
If you judge by exchange-traded funds tracking single countries, the markets with the most momentum right now include Brazil, India and China. Indonesia has also been strong, and so have Taiwan and Thailand. Clearly, emerging markets are on the rebound after some tough years.
A smart way to profit from this turnaround is to use a diversified emerging market ETF rather than betting on individual countries. These ETFs are cost-effective thanks to their low fees, and they're widely diversified. Example: The Vanguard FTSE Emerging Markets All Cap Index ETF (VEE) has a management expense ratio of 0.24 per cent and includes China, India and Brazil among its top holdings (China is the largest at 27.5 per cent).
What should your bond strategy be in a low – or even negative – rate environment?
People asking this sort of question sometimes seem to be seeking permission to dump their bonds and put all their money in stocks. Don't do it.
Bond yields are strikingly low– lend your money to the government of Canada for 10 years and your reward is a yield of just 1 per cent these days. Worse, there are countries around the world where bond yields are negative, including Japan and Switzerland. This essentially means investors are willing to lose money by keeping their assets safe in government bonds.
None of this invalidates the main reason for holding bonds, which is to act as a hedge against economic setbacks or a stock market crash. In today's world, you cannot dismiss the possibility that these events will occur. Bonds are your insurance policy.
Figure out a sensible portfolio weighting in bonds based on your risk tolerance, age and investing goals. Consider using diversified bond exchange-traded funds, which can help bump up your yield a bit by exposing you to corporate as well as government bonds, and to a mix of short-, medium- and long-term bonds.
How should I change my investing strategy if the U.S. Federal Reserve hikes rates this fall while the Bank of Canada stands pat? And
what will the outcome of the U.S. election mean to Canadian investors?
Investing strategists might suggest some portfolio gyrations to address these potential outcomes, but there are two good reasons why you shouldn't listen. First, it makes no sense to position a portfolio for global events that may not turn out the way you or pundits expect. Remember the result of the British vote on European Union membership? Investors who bet on a victory for the Remain side got a rude shock when the Leave campaign unexpectedly won.
Second, basic portfolio diversification is the best way to prepare for future events, be they political or economic. Don't micromanage your U.S. exposure. Simply find a weighting that makes sense and stick to it. One approach is to evenly divide the stock side of your portfolio among the Canadian, U.S. and international markets.
It feels like everything is up this year – U.S. and emerging market stocks, bonds, oil, even the loonie. What asset classes are looking the most vulnerable to a pullback?
Keep your eye on interest rates. A wide swath of rate-sensitive investments are vulnerable when borrowing costs start to edge higher. Included here are bonds, particularly government bonds, utility and pipeline stocks and real estate investment trusts (REITs).
Let's be clear about what would happen. Bond and share prices would fall, but interest and dividend payments would continue. Remember, rates rise because the economy is improving. That makes companies and governments financially stronger.
Another sector that could be vulnerable to a pullback is consumer staples, which is the top-performing sector on the Toronto Stock Exhange on a cumulative basis over the past three- and five-year periods. Consumer staples is the classic defensive play. Stocks like Metro Inc., Cott Corp. and Maple Leaf Foods Inc. have produced huge gains in recent years. If investors get more comfortable with risk, they might dump consumer staples and move on to something with more growth potential.
What's the next potential crisis to keep an eye on?
Italy's banks are in poor shape; some of them are buckling under an unmanageable amount of bad debt. If their troubles can't be resolved, it represents a serious risk to an economy that is larger than Canada's and the fourth-largest in Europe. Japan's economic challenges – stagnant growth and an aging population – are another concern. And don't dismiss the potential for a black swan event, which means something largely unforeseen. Expect something bad to happen at some point – it always does. Prepare for it by keeping some of your portfolio in bonds and keeping a small amount of cash to buy bargains that emerge.
Should I buy a non-hedged U.S. equity ETF when the Canadian dollar is so low? Does currency risk matter over the long term?
No, it doesn't matter for the long term. Over the 20 years to July 31, the difference between the compound average annual total return of the S&P 500 in U.S. and Canadian dollars was a negligible 0.28 of a percentage point (in favour of the U.S.-dollar return). A lot of investing pros avoid hedging for this reason, and because it's an inexact process that can very mildly undermine your returns compared to the benchmark.
However, a lot of investors feel that they have to be "winning" all the time in their choice of whether to hedge or not. Unhedged investors do well with U.S. stocks when our dollar falls, but have their returns undermined when our dollar rises. Hedged investors get protection from a rising loonie, but lose out on the extra returns created by a falling dollar.
If you can't stand being on the wrong side of the Canadian dollar in your U.S. investments, hold both hedged and unhedged ETFs in equal proportion. Otherwise, don't bother with currency-hedged funds.