For new investors, the stock market can feel like a maze. With over 3,000 stocks listed on the Toronto Stock Exchange alone, the choices can be overwhelming. How do you know which stock to buy, and when? If you’re just getting started, there’s one simple, time-tested investment that could provide you with a lifetime of security: Canadian bank stocks.
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The power of Canadian bank stocks
When it comes to investing, Canadian bank stocks have consistently delivered solid returns for long-term investors. These blue-chip stocks are known for their stability, profitability, and impressive dividend yields. For instance, the BMO Equal Weight Banks Index ETF (TSX: ZEB), which tracks the Canadian banking sector, has delivered a total return of approximately 161% over the last decade. That essentially turned an initial investment of $10,000 into $26,140, demonstrating the long-term wealth-building potential of Canadian bank stocks.
Why Canadian bank stocks are a smart choice for beginners
Canadian banks have proven to be resilient even in the toughest times. During the 2007–2008 global financial crisis, when bank stocks around the world took a major hit, Canada’s big banks remained profitable. Even during the pandemic market crash of 2020, they were able to recover quickly and continue growing. In fact, corrections and pullbacks in the stock market turned out to be the best buying opportunities for long-term investors.
Let’s take Bank of Nova Scotia (TSX: BNS) as an example. During the 2020 pandemic market crash, the stock fell from a high of around $57 to a low of about $37.50 – a drop of a third of its value. Despite a 21% decline in earnings per share for that fiscal year, the bank rebounded quickly, with earnings growing 45% in fiscal 2021, followed by much more moderate growth of 4% in fiscal 2022. By late 2023, the stock had dropped to $52.50 per share (earnings fell 28% that fiscal year), but its dividend yield had soared to 8%. Even if you didn’t buy at the very lowest point, you could have still locked in a dividend yield of around 7% with significant price appreciation of about 29%.
Today, after reporting its latest earnings, the stock dipped around 3%, offering a dividend yield of 5.5%. While this yield is not its most attractive, it’s still a solid time to consider buying on a dip.
Diversifying with an ETF or buying individual bank stocks
If you’re concerned about putting all your money into a single stock, you can opt for a more diversified approach by investing in an exchange traded fund (ETF) like the BMO Equal Weight Banks Index ETF. This ETF includes Canada’s big six banks, spreading your investment across multiple companies, and offers a blended dividend yield and total returns.
For those comfortable holding individual stocks, Toronto-Dominion Bank (TSX: TD) might be worth considering. Though it’s been under some pressure recently due to an anti-money laundering case that led to a US$3 billion fine and capped growth in the U.S. market, the stock offers a dividend yield of 5.1% at $79.34 per share as of writing. While TD is facing some short-term challenges, long-term investors who exercise patience are likely to enjoy solid passive income and strong total returns.
A simple investing strategy for long-term security
For a beginner looking to invest in stocks, Canadian bank stocks provide a straightforward, secure, and profitable path to building wealth. Whether you choose an individual stock like Toronto-Dominion Bank or diversify with an ETF like the BMO Equal Weight Banks Index, the Canadian banking sector offers a great foundation for a diversified portfolio. With their strong history of profitability, reliable dividends, and potential for growth, these stocks can provide you with a lifetime of financial security, especially if you load up shares on market corrections and have sights set for the long term.
