If you wanted to find consistency and a healthy income stream from a stock where would you turn?
Investing in Banks is a great base for stock portfolio investment because of the steady cash flows they offer and there performance consistency. Banks are ‘cash cows’ as they are mature businesses with relatively slow yet consistent growth and produce steady cash flow streams through dividends.
According to Michael Assouline, investment analyst at Raymond James, “Want to beat the market? Put your money in Canada’s Big Five banks. It’s as close to a sure-fire bet as you can make.” Mr. Assouline’s claim is not speculative, data from the past decade is proof: The top performing of the big 5 banks, the Royal Bank of Canada (RY) has blown the S&P/TSX index out of the water producing an average annual return of 19% while accumulating a 484% return inclusive of dividends over the decade, beating the S&P/TSX index by a substantial 330%.
Royal Bank of Canada (RY) * Michael Assoline’s Pick (Analyst @ Raymond James Financial)
Toronto Dominion Bank (TD)
Bank of Nova Scotia (BNS)Add National Bank of Canada (NA) to get ‘the big 6 banks’
Bank of Montreal (BMO)
Canadian Imperial Bank of Commerce (CM)
Well of course the Royal Bank of Canada (RY) outperformed the market; it is the top performer of the big 5 you say! However, even the laggard of the group, the Bank of Montreal (BMO), outperformed the market by 160%. This seems outrageous; however, the cumulative return inclusive of dividends over the past decade for the Big 5 Banks was about 18% a year.
So when should I buy and which Bank stock should I buy?
The Key features that must be considered when evaluating Bank Stocks are P/E ratios and Dividend yields; although, many other variables may be considered. My advice is to look to the P/E and Dividend yield for entry points and if you think yourself more astute than the market sell when things become too good in your view.
If you buy any of these banks your investment is very likely to beat the market if you hold the investment long enough. This means even if you bought at a market top you can still be profitable over the long run. The best time to buy though is when the market turns its back and beats up the stocks: probably when yields creep up above 4 or 5 %.