Why Now Could Be a Great Time to Load Up on Bank Stocks

Royal Bank of Canada (TSX:RY)(NYSE:RY) could be a great dividend stock to buy on the dip, especially if home sales get stronger in the coming months.

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Lending companies and Big Banks have been struggling this year. Higher interest rates and stiffer rules to obtain mortgages have made it more difficult for individuals looking to buy homes. The good news is that there could be relief on the way. As of September 2, first-time home buyers could be eligible for some help.

For those with household incomes of up to $120,000, the home-buyer incentive program announced in the most recent federal budget will see the Canada Mortgage Housing Corporation pay 10% of the down payment for a newly built home and 5% for a resale.

While there are price limitations that would prevent most buyers in Toronto and Vancouver from benefiting from these incentives, it could still help in other Canadian markets, where prices have not soared to the same levels.

That’s good news for bank stocks, as it could help lead to more mortgages being taken out. Although the Big Banks have performed well this year, their share prices have been kept down as a result of a lot of negativity in the economy and concerns that we’re headed for a slowdown and that home sales will struggle. Even the expectation that will be more homes being sold could be a significant factor in bank stocks gaining some momentum.

For instance, Royal Bank of Canada (TSX:RY)(NYSE:RY) has seen its share price fall 4% over the past six months, and year to date it’s up around 7%. Despite an improved year for the TSX in 2019, RBC and other bank stocks haven’t seen the same results, as they have underperformed the market thus far, surprisingly.

That’s why it could be the perfect time for investors to scoop up a stock like RBC. With the Big Bank stock being a pretty good buy at less than twice its book value, it’s a safe bet to rise in value.

After all, whether it’s population growth or rising fees, banks will always find ways to generate more sales and profits. Throw in the possibility of some stronger home sales and you’ve got a great opportunity for the stock to see a positive finish to the year.

While the temptation may be to look at the recently struggling Vancouver market as a reason to be concerned, Canadian home sales in July were up 12.6% from the prior year. Although prices may be falling, sales have been rising in B.C.’s Lower Mainland as well as other key markets across the country.

With rumblings that we could again see interest rates being cut, there could be even more reason to be bullish on home sales in the coming months, as it could become cheaper to take out a mortgage.

Bottom line

RBC and other bank stocks haven’t fared well lately, but they’re often the safest investments to hold in a portfolio. Even if you’re looking for more than just a solid dividend to own, RBC could prove to be a valuable addition to your portfolio given how cheap the stock is today.

If it does indeed get a boost in the next quarter, we could see the stock make up for what’s been a very mediocre year thus far.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

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