Bank stocks are usually great investments, regardless of when you’re looking to buy them. But if you’ve got a Tax-Free Savings Account (TFSA), now may be an optimal time to start adding bank stocks to your portfolio if you haven’t done so already. Below, I’ll look at why they’re hot buys, including one of the best deals that’s out there right now.
Prices are low and yields are high
Investors have been bearish on bank stocks this year, as fears of a recession are causing lenders to load up their reserves in anticipation of what may end up being a prolonged downturn in the economy.
For instance, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is down around 15% this year, falling even more than the lacklustre TSX, which has declined by just 9%. Not only is the top bank stock trading at a very modest 10 times earnings and right around its book value, but it’s also paying a dividend that’s now yielding about 6.4% per year.
Generally, whenever a stock’s yield is up over 5%, that usually suggests investors should have a closer look. Yields of more than 6% aren’t normally sustainable. However, with bank stocks, one thing they’re known for is paying good dividends over the long haul.
A recession could weigh on a bank’s dividend and even lead to a potential cut or suspension of it, but those are short-term moves, and once the economy recovers, so too will bank stocks and their payouts. It’s also not a scenario I see happening, which is another reason why now is a prime time to buy.
If you wait for a recovery, the opportunity could be long gone
It may be tempting to wait for the pandemic and recession to end, but by then, bank stocks could be back to the prices they were at before the downturn started. Last year, shares of CIBC traded as high as $115. If you were to buy the stock at around $90 today and it recovered to those levels, that would produce a return of about 28%. Not only that, but you’d also benefit from having a higher yield from buying the stock while its price was low.
Suppose you invested $10,000 into CIBC today. A 28% return would mean a profit of $2,800 — all of which wouldn’t be taxable inside of a TFSA. And if the dividend remains intact, it could produce another $640 in non-taxable income. In total, you could make more than $3,400 if the economy starts to recover within a year.
A case could be made that the economy is already starting to turn things around, and the sooner the pandemic ends, the quicker it’ll be that the economy is back to where it was before COVID-19.
Bank stocks are safe buys, and if you get a chance to add some to your portfolio when they’re on sale, you shouldn’t pass up the opportunity. A year or two from now, you could be kicking yourself for not investing in some of Canada’s top banks right now.