There’s a quick – and newly cheap – way to get into bank stocks in advance of the dividend hikes to come.
Shares of the Big Six banks were up almost 50 per cent in the 12 months to late August on average, but there’s still a strong case for buying in.
Regulators prohibited banks from increasing dividends and buying back shares when the pandemic blew up in March, 2020, and they’re still waiting for a green light to resume. When that happens, it’s expected that dividends will be increased significantly.
An easy way to scoop up dividend increases from all big banks would be to buy the $2.1-billion BMO Equal Weight Banks Index ETF (ZEB-T), which holds all six of the big banks in more or less equal proportion. Readers of this blog may recall I was critical of ZEB recently because its management expense ratio was flat-out expensive at 0.6 per cent.
Now, BMO is addressing that problem. The management fee for ZEB (that’s the biggest component of the MER by far) will be cut to 0.25 per cent from 0.55 per cent, effective on or about Sept. 1. Expect the MER for ZEB to be roughly 0.28 per cent.
The new, lower cost of owning ZEB helps make a strong case for buying the banking sector as opposed to buying individual bank stocks. Think of the MER as a cost for rebalancing your portfolio of bank stocks on a continuing basis. No need to pay brokerage commissions to manage the portfolio with buy and sell transactions.
Kevin Gopaul, president and chief commercial officer of BMO Exchange Traded Funds, said the fee cut was made to draw attention to ZEB at a time when there’s a positive outlook for bank stocks.
“The banking sector is such an important sector for people to invest in now because of macro factors like immigration,” Mr. Gopaul said. “There will be 1.2 million new permanent residents in Canada over the next three years. A lot of those people will need banking and they’ll help the banking sector grow. Also, at some point, the Canadian banks will be permitted to resume stock buybacks and raise dividends. That further strengthens the story for the sector.”
The distribution history for ZEB – it’s available to view on the fund’s product page online – shows it’s an effective way to capture rising bank dividends. ZEB has been paying out 10 cents a month in cash for the past two years, up from 7.2 cents five years ago.
Lots of investors will prefer to choose a few bank stocks, and that’s totally legit. But if you want the entire banking sector in your portfolio, ZEB is an easy – and, now, fairly priced – way to do it.
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
National Bank shakes up its Dividend All-Stars portfolio
National Bank has released an update to its 2021 Dividend All-Stars portfolio. The firm initially published its recommended list of high-yield securities to own in 2021 on Feb. 16. Since then, the portfolio has outperformed the S&P/TSX Composite Index by a wide margin. Jennifer Dowty tells us about the changes.
Number Cruncher: 15 U.S. financial companies with bullish price momentum
Number Cruncher: 15 mid-cap dividend stocks that may be flying under your radar
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
What’s up in the days ahead
Is there an opportunity in Canadian banking stocks following this week’s earnings parade? David Berman thinks there’s one stock looking particularly attractive right now. He’ll tell us more this weekend.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff