Canadian bank stocks have been serious underperformers in recent years. And while it is so tempting to throw in the towel on your various bank stocks or exchange-traded funds, I think doing so could be a mistake as pessimism continues to mount. Of course, bank stocks won’t make you rich. They’re blue-chip darlings that tend to appreciate quite slowly, especially versus your hot tech stock of the day!
That said, I think the bank stocks are an incredible value right here. Though it will be impossible to tell when they can rally again, every move lower will help prop up dividend yields. Further, many banks seem well positioned to continue increasing their dividends from here, even with provisions weighing and the threat of recession looming.
All considered, the main reason to stand by Canadian bank stocks is their bountiful dividend yields, which are incredibly well covered. Bank stock yields are skewed towards the higher end of the historical range. But in an era where 5% risk-free rates are the norm, don’t count on a 4.5-5% yield in a seemingly risky bank stock to draw in a considerable amount of investor interest.
Canadian bank stocks look attractive if you’re looking to invest for the longer term
That said, if you’re thinking about investing for the next 15-20 years, the banks could be very smart buys right here. Risk-free rates won’t stay above 5% forever. By the time your next Guaranteed Investment Certificate (GIC) matures, it’s difficult to say what market rates will be. They may be higher, but they could also be lower. The longer we look out (say five years), the lower rates are likely to be.
If you buy a bank stock here and now, the yield based on your principal won’t go down. In fact, a few dividend hikes will make the payout that much more rewarding. Of course, as shares climb, the yield will contract. But if you’re buying now and holding for years, the yield on your invested principal only stands to get better.
TD Bank stock: A Canadian bank worth consideration
At writing, TD Bank (TSX:TD) stands out as a great bank to own for the next decade. Why? Its U.S. exposure is very underrated right now. After a few American regional banks went bust earlier this year, it’s hard to view them so fondly.
In any case, TD Bank has ample purchasing power to pursue a regional bank at a nice discount. Though the bank is probably fine sitting on its hands as the recession moves in on the Canadian economy, I’d not discount the bank’s ongoing expansion into the American retail banking scene.
Today, the stock trades at 10.58 times trailing price to earnings, with a 4.62% dividend yield. While you could get better rates from a risk-free asset, I think longer-term investors would be better off setting their future selves up while the bank is heavily out of favour.
In the meantime, it’s tough sledding. But further out, the bank looks well positioned to weather a potential economic hailstorm.