Canadian bank stocks have been out of favour for an absurd amount of time now. From the subtly weakening macro picture to fears of a coming Canadian recession, the banks seem to be flying in no man’s land. Despite the numerous headwinds, lack of catalysts, and the unforeseen barrage of U.S. regional banking runs and failures back in spring, I still stand by Canada’s Big Six Canadian banks.
Though I have no idea (nor does anyone else) know what the path for the big bank stocks will be over the next six months or the full year, I do know that the dividend payments are bountiful. And the price of admission is quite reasonable relative to most other stocks driving up this market.
Undoubtedly, slightly swollen dividend yields in the bank stocks accompany slightly higher risks. We are headed for a recession, after all. In addition, bank yields may not be nearly as enticing in today’s high-rate world. Back when rates were at or around the floor, a 3-5% yield would have been incredibly attractive.
Nowadays, you can score a 5% rate on a risk-free asset, like a GIC (Guaranteed Investment Certificate) at your local bank. And you can sleep easy knowing that the invested principal isn’t going anywhere, even if the coming recession is far more hideous than pundits expect.
Banking on the big bank dividends!
For now, the risks with banks, I believe, are worth bearing. Though GICs and risk-free rates are far more competitive, I’d argue that rates will not stay at these heights for long. Though a few more rate hikes from the Bank of Canada are definitely possible in the second half of this year, rates are expected to peak and decline in a few years down the road. Maybe rates will fall in mid- to late 2024 or perhaps 2025.
Regardless, inflation is backing down. And with that could come the beginning of the end of the central bank’s tightening cycle. Indeed, I like to view interest rates like gravity. What goes up must (eventually) come down. Of course, it could take many years (or even decades) for rates to return to pre-pandemic levels. Regardless, when rates do begin to drop, GIC rates could fall, and the swollen yields on battered dividend stocks will become more competitive again.
The big bank dividend yields are yours to “lock in.” When shares appreciate, yields could fall again, even with the annual dividend hike considered. Undoubtedly, the power of the bank dividends is more notable when you’ve got a very long time horizon (say, 10 years).
TD Bank: Still a great bank stock
TD Bank (TSX:TD) is just one Canadian bank that I think is worth pursuing while it’s stuck in a bear market. Today, shares sport a 4.8% dividend yield, which is quite attractive, even when considering you can score a one-year GIC with a similar rate.
The stock itself looks dirt cheap at just north of 10 times trailing price to earnings. Though TD faces unique headwinds to its peer group, most notably its large U.S. exposure, and the recent direct deposit outage suffered last Friday, I’d argue that the risk/reward scenario is tough to top from a longer-term perspective.
These days, U.S. retail banking is out of favour. In a few years, it could be viewed as attractive again, especially if TD Bank goes on the hunt for an acquisition again. In any case, TD is rich with cash and value. It just needs to sail through a high-rate storm that could see loan growth stall for some period of time.