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Will retail investors ever buy bank stocks again?
That might sound like a ridiculous question to ask, but there is no doubt that investors are wary of big American banks right now. Since the beginning of the year, for example, Bank of America (NYSE: BAC ) is down over 50%, and Citigroup (NYSE: C ) is down over 40%. Overall, it feels like investors don't trust banks anymore, so these companies have been hit hard as a result.
I was talking about this subject the other day with Jim Gillies, advisor of Motley Fool Options, and he told me that there actually were some bank stocks out there that would allow investors to sleep well at night. He suggested that investors look "north of the border" at Canadian bank stocks, which he described as the "ultimate stocks for widows and orphans" for their reliability.
According to Jim, Canadian banks are attractive for the following reasons:
- They have compelling valuations.
- They have impressive and growing dividend yields.
- They operate in a relatively safer environment.
And here are five Canadian banks that investors should consider:
Market Cap (in billions)
|Bank of Montreal (NYSE: BMO )||$36.4||4.8%||11.4|
|The Bank of Nova Scotia (NYSE: BNS )||$55.2||4%||11.4|
|Canadian Imperial Bank of Commerce (NYSE: CM )||$29.3||4.8%||11.4|
|Toronto-Dominion Bank (NYSE: TD )||$64.6||3.7%||12.8|
|Royal Bank of Canada (NYSE: RY )||$66.9||4.5%||12.2|
Data in U.S. dollars. Source: S&P Capital IQ, Oct. 13, 2011.
Jim believes that investors are selling all banks indiscriminately in recent months, but that Canadian banks are very different from their American brethren. They are much better regulated, and they operate in a much less risky environment. For example, Jim notes that there are fewer incentives for homeowners to walk away from their mortgages in Canada compared with America. Ultimately, Jim feels that "Canadian banks are very stodgy" and are "perfect for conservative investors."
Canadian banks also pay generous and growing dividends. Jim sees this as a particularly attractive feature of these companies and says, "These banks just do not cut their dividends." In fact, Jim adds, "Toronto-Dominion has raised its dividend twice this year." He owns both Royal Bank of Canada and Bank of Montreal specifically for their dividend histories.
As a result of the country's carefully regulated market, Canadian banks have performed very well over the past decade, according to Morningstar. These stocks appear to offer investors attractive yields at reasonable valuations, and without too much stress. Canadians may not like it when Americans call them boring, but this seems to me to be a case where boring is better.
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