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Take Advantage of Historically High Yields From the
World's Soundest Banks |
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-- By Carla Pasternak |
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Wayne Gretzky once described the key to his
hockey success: "I skate to where the puck is going to be, not to where
it has been." This is great advice for investors -- especially
if they're looking at Canadian banks.
Canada's banks have taken a hit with the broader market, but
it's where these stocks are going next that makes them well
worth considering.
Canada's six major banks command 90%
of the industry's assets. Five trade on the NYSE. They
aren't household names for
U.S. income investors, but they should be. For one thing, they
carry dividend
yields of up to 8.5%. They also boast an average 3-year dividend
growth record of +16.8%, and in the past year alone they've
raised their dividends an average of +18.8%.
(Full Story Below) |
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Take Advantage of Historically High Yields From the World's
Soundest Banks
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It may come as a surprise to some, but
Canada's banks were rated as the world's strongest by the
World Economic Forum late last year. Canadian lenders scored top marks as the most
solvent among 134 countries. The banks also rated fifth for investor protection and sixth for
financial market sophistication.
Standard & Poor's recently came to the same conclusion. The rating agency wrote in a
mid-October client note that Canadian banks are well positioned
to weather the downturn. Despite some challenges, S&P analyst Lidia Pareniuk said Canada's banks have "substantially more
robust balance sheets and capital positions and lower risk
profiles" than their peers in either the U.S. or Europe.
Canada's banks have escaped the U.S. subprime mess relatively unscathed:
They've taken combined write-downs of about C$16.2 billion -- a tiny portion of
the $1 trillion of write-downs and
losses suffered by banks around the world since the third
quarter of 2007.
The tightly regulated Canadian banking system assures the
strong financial condition. The conservative capital ratios of
Canadian banks are the envy of the world. According to Bank of
Canada Governor Mark Carney, Canadian lenders maintain an
average asset-to-capital ratio -- a measure of loans issued to
cash on hand -- of 18. He compared that to an average of 25 for
U.S. investment banks, 30 for European banks, and more than
40 for some major global banks.
Major Entry Opportunity
Despite this, Canadian banks are being punished along with their
peers around the world. Canadian bank stocks, as measured
by the iShares Canadian S&P/TSX Capped Financial Index, are down more -30% during the past
six months.
That spells opportunity. Since price and yield move in opposite
directions, yields on Canadian bank
stocks have risen to unprecedented levels.
For example, shares of one Canadian bank
have lost just over -40% since August 1st, pushing the yield to
8.5%, which amounts to more than 2.5 times its average
yield of 3.2% during the past decade.
For another Canadian bank, it's the
second verse of the same song. Its low stock price has
catapulted its yield from a 10-year average of 3.3% to 7.1%.
Of course, an elevated dividend yield sometimes
signals a dividend at risk. While we can
never rule out a dividend cut down the road, recent actions
suggest that Canadian banks are generally confident in their
future and that their dividends are secure.
Two Canadian banks, for instance, raised their
dividend during the past 12 months; three others increased their
dividend in 2007 and have maintained the new payout.
Tasty Yields and Capital Gains
Though Canada's banks aren't asking for any sort of
bailout and certainly don't need one, tight credit markets and slowing demand for Canadian exports are weighing on the
economy and dampening the outlook for the country's
banks. But that caveat notwithstanding, Canada's economy is projected to fare better
than the United States, Japan and most of Europe. Its growth
rate will still be positive in 2009. Analysts expect to see an
expansion of about +1% this year and a far stronger +2.4% in 2010.
There's some additional good news. In addition to
tasty yields, Canadian bank shares carry
substantial long-term capital gains potential. The two
banks featured above -- trading with more than twice their average dividend
yield -- would have to gain more than +100% for
their yields to revert to historical levels.
Meanwhile, investors can
collect a nice revenue stream while they wait.
Follow this link to learn more about my two favorite
Canadian bank picks featured in today's issue.
Thanks for joining me on my search for today's
highest-yielding securities!
-- Carla Pasternak
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address,
Research@GlobalDividend.com,
to your Address Book or Safe List. For instructions,
go
here.
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| Income
Notes
Two-year Treasury bonds yield less than 1%; the 30-year bond
is less than 3%. Ten-year Treasury yields have averaged just over
4.5% since 1798. Today they offer just 2.5%.
Corporate-bond yields are not that high in historical terms, but
the spread they offer relative to government bonds is
extraordinary. And at 3.3%, the dividend yield on the U.S. market
hardly seems mouthwatering, but it's higher than the long-term
Treasury-bond yield for the first time since the 1950s.
--
The Economist
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Although Treasury rates have begun to rise, few could argue that
their still-anemic yields have much to offer long-term
investors.
That isn't the case in the corporate sector. In October and
November, some investment-grade corporate bonds offered yields
as high as 8% or 9%, representing an additional 5 to 6
percentage points over Treasuries. The average junk-bond yield
recently climbed higher than 20%.
Although corporate bonds have recovered some ground in recent
weeks -- as of Jan. 8, the yield on the Barclays Capital U.S.
Corporate Investment Grade Index had dropped to 7.3%, down from
9.1% at the end of October -- many argue that there's still
plenty of value to be had in the corporate sector.
--
Morningstar
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Why I Buy Every Stock This Analyst Recommends
First, every month she
puts out her single best pick for today's market. Next,
she keeps picking stocks that make money. (She has an
85% win rate, and July's pick shot up +18.2% in just 13
days.)
Go here to see for yourself. |
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Recent
Articles
Four
Income Hotspots For a Prosperous New Year
By Andy Obermueller
January
7, 2009
Although the U.S.
could rebound in the second half of 2009, many of the world's
countries aren't in recession at all. Plenty of places are booming.
What's more, stocks in these countries are usually cheap, and best of all,
we've found four nations that add a higher-than-average dividend
into the mix.
Read
On...
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