Are Canadian bank dividends safe going forward? We could very well be heading into a recession at some point in the near future, and banks’ loan losses always seem to rise and their stocks take a hit in such an environment.
I agree that we are heading into a recession at some point. But nobody knows if it will be next year, three years from now or at some later date. While it’s prudent to be mindful of the risks when investing, focusing too much on what might go wrong can be a recipe for paralysis.
Instead of worrying about a possible recession “in the near future,” I suggest you focus on the long term. Ask yourself where bank stock prices will be, not next month or next year, but five years from now. I would wager that they will be significantly higher than they are today. It might help to look at a long-term chart of a stock such as Royal Bank (RY) or Toronto-Dominion Bank (TD). You’ll notice lots of peaks and valleys, but the overall trend has been up. Way up.
What’s more, the fact that interest rates are rising is actually a good thing for the banks. Rising rates increase the banks’ “net interest margins” – the difference between what banks earn on loans and what they pay out to depositors and other lenders.
As for dividends, Canadian banks are extremely well capitalized, and they’re continuing to rake in billions of dollars in profits every quarter. Analysts expect the banks to continue raising their payouts after announcing hefty dividend hikes late in 2021.
Also keep in mind that, even in bad times, dividend cuts are extremely rare among the big Canadian banks. With the exception of National Bank – which last cut its payout in 1992 – the major banks have paid stable or rising dividends for more than a century. Typically, during a severe economic downturn, banks will hold their dividends steady for a year or two – as they were mandated to do during the pandemic – rather than cut them.
If you’re planning to invest in Canadian bank stocks, just remember to own them as part of a well-diversified portfolio to help control your risk.
Further to your recent comments on Canadian companies paying dividends in U.S. dollars, how are dividends treated from Canadian banks that are also traded on the New York Exchange? Does the dividend tax credit apply here as well?
If you buy 100 shares of Royal Bank, you own 100 shares of Royal Bank. It doesn’t matter if you bought the shares on the Toronto Stock Exchange in Canadian dollars, or on the New York Stock Exchange in U.S. dollars. Nor does it matter if you hold your shares on the Canadian dollar side of your account and receive your dividends in loonies, or on the U.S. dollar side of your account and receive your dividends in the currency-adjusted equivalent of U.S. dollars.
As Royal Bank is a Canadian company, its dividends qualify for the dividend tax credit. This is true regardless of the exchange on which you purchased the shares or the currency in which you receive the dividends.
My daughter recently started her first full-time job and she will soon have money to invest. Is there any advice you can pass along?
Yes, keep it simple. Having gone through this exercise with my university-age son recently, I know that investing can be daunting for people just starting out.
Rather than jump into individual stocks, I suggest that you consider index exchange-traded funds. Your daughter will need to open a discount brokerage account to buy ETFs, but the flexibility it provides her now and in the future will be well worth it. Index-tracking ETFs have very low costs, provide excellent diversification and may help to reduce the temptation to trade frequently that often afflicts novice investors (and even experienced ones) who buy shares of individual companies.
Since your daughter will be earning a regular paycheque, I’m assuming she’ll want to contribute to her account regularly when she’s able to save up sufficient cash. For that reason, I also recommend that she shop around for a discount broker that offers commission-free ETF purchases and sales, as many brokers do. This will slash her investing costs even further and make it economical to contribute even small amounts.
My son chose to open an account with BMO InvestorLine, which offers close to 100 ETFs with commission-free trading. He started off with two: The BMO S&P/TSX Capped Composite Index ETF (ZCN) and the BMO S&P 500 Index ETF (ZSP). The management expense ratios for ZCN and ZSP are 0.06 per cent and 0.09 per cent, respectively.
Other brokers including Scotia iTrade and Qtrade Direct Investing also offer commission-free ETF trades, and there are many other worthy index ETFs to choose from.
Perhaps the most important advice you can give your daughter is that she doesn’t need to do a lot of intensive research or become a savvy trader to build wealth. All she needs is to be diversified, reinvest her dividends regularly and let time and compounding do the heavy lifting.
E-mail your questions to email@example.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.