Keeping cash is good for instant liquidity but not the king in an inflationary environment. The optimal strategy to prevent cash from losing its value rapidly during high inflation is not to let it sit idle. Put some of your idle cash to work by investing in dividend stocks with a rate of return that’s higher than the inflation rate.
Canadian Imperial Bank of Commerce (TSX:CM), or CIBC, is the ideal productive asset today for regular, unsophisticated, or novice investors. At $56.56 per share (+6.49% year to date), the big bank stock pays a hefty 6.23% dividend.
Assuming the dividend yield remains constant, a $15,000 investment will grow to $27,833.72 in a decade. Extend the holding period to 15 or 20 years, and the money will compound to $37,915.03 and $51,647.75, respectively. If you double the investment to $30,000, the final balance in 10 years, including dividend reinvestment, is $55,667.45.
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Stable sector
Canadian big banks are defensive blue-chip stocks and better capitalized compared to the rest of the world. With its $51.9 billion market cap, CIBC is Canada’s fifth-largest financial institution.
Like its industry peers, the bank’s dividend track record is more than a century (155 years and counting). It’s also a Dividend Aristocrat owing to 12 consecutive years of dividend hikes.
Some market analysts believe CIBC is a screaming buy, because it’s undervalued or trades 45.8% below its fair value. Based on their price targets in 12 months, the return potential is between 12.7% ($63.76) and 30.5% ($73.83).
Solid earnings
Canadian big banks had to raise provisions for credit losses (PCLs) and sacrifice income in the second quarter (Q2) of fiscal 2023. Only CIBC reported a year-over-year increase in net income, despite a 45% increase in PCLs to $435 million. In the three months that ended April 30, 2023, revenue and net income rose 6% and 11% to $5.7 billion and $1.7 billion versus Q2 fiscal 2022.
Its president and chief executive officer Victor G. Dodig said, “We continued to execute on our client-focused strategy, delivering solid financial results in the second quarter by leveraging the investments we’ve made in high-touch, high-growth markets and furthering our strengths in talent and technology.” He assured investors that CIBC’s well-diversified business remains resilient in a more fluid economic environment.
CIBC expects rate cuts to happen by June next year and predicts a fall to 3.5% by year-end 2024. A report by the bank’s chief economist Avery Shenfeld and senior economist Andrew Grantham forecasts another rate hike of 0.25% by the Bank of Canada. The policy rate would climb to 5% either in July or September 2023 and stay high longer in the status quo.
Investment takeaway
Idle cash will not appreciate and produce negative real-adjusted returns if it loses value due to inflation.CIBC is a solid investment choice for investors putting their idle cash to work. Its safe and secure dividends should also lessen the impact of inflation.
The stable bank has a broad range of portfolios with four strategic units contributing to business growth. Besides Canada, its network includes operations in the U.S., the Caribbean, Asia, and the United Kingdom. Expect the broadening of its geographic reach in the future.
