If you’re a Canadian investor, you may have heard that Canadian banks are great long term investments. Those of you who regularly follow this blog know that I love my dividends and if you look at my dividend income reports closely, you’ll see that the majority of my dividend income comes from the banks. I own shares in Toronto Dominion Bank (TD), Bank of Nova Scotia (BNS), CIBC (CM) and Bank of Montreal (BMO) and over the years I’ve been rewarded with share price appreciation and rising dividends.
Canadian banks are a core holding in my investment portfolio and for good reason. The Canadian financial system is highly regulated and among the best in the world. In contrast to the U.S. banking system where thousands of banks exist, the Canadian market is dominated by the Big 6. While competition among the 6 major banks can be quite intense, their respective market shares have been relatively constant over time which produces consistent and stable earnings.
Some Canadian banks have been around for over 200 years. They’ve paid a steadily rising stream of dividend income over that time and will continue to do for many years to come. With the Canadian banks, you get a combination of (rising) dividend income and capital appreciation which is a major reason why they should be core holdings in any investment portfolio. They have long histories of making money in good times and in bad by raising their banking fees.
Since their 2009 lows, Canadian bank stocks have tripled in price and increased their dividends substantially. There are certainly some headwinds to their recent record-breaking performance such as fears of a housing bubble and a recession, but my view is that Canadian banks have always been great long term investments. So if there is a substantial price pullback (10% or more) then that will be a good time to jump in and buy more.
For those of you who are eager to start investing directly in Canadian banks there are a few options to consider. First, you may want to own a particular bank directly. You can do so by opening an online discount brokerage account through Questrade and start buying bank stocks for as little as $4.99 per trade. I’d recommend this if you plan on investing at least $1000. For anything less you may consider setting up a Dividend Reinvestment Plan (DRiP) and Share Purchase Plan. This involves buying shares on a monthly or quarterly basis in a given bank through its transfer agent. Once you acquire the initial share, the minimum amount to start investing in more shares is around $100 (for BNS and CM) and there is no minimum for investing in BMO. Also, I should mention that the 2 largest banks, Royal Bank (RY) and Toronto Dominion (TD), don’t offer Share Purchase Plans.
An alternative to owning the banks individually is to buy them as a group. You can do so by investing in an exchange-traded fund that tracks the financial sector. The iShares XFN is market cap weighted which means that the larger financial institutions make up the bulk of the fund. The BMO ZEB is an equal weight ETF which means that each of the banks are represented in equal proportion to one another. To purchase ETFs you’ll need a discount brokerage like Questrade, and you can set up an automatic purchase plan where you can acquire them on a commission-free basis for as little as $25/month. You will however be charged a commission fee when you sell them.
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