Author Topic: Need Clarification on Canadian Bank Stocks Dividends  (Read 1833 times)

AlwaysDreaming

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Need Clarification on Canadian Bank Stocks Dividends
« on: October 16, 2016, 01:39:27 AM »
Hi, I'm 25 years old and currently have about 50k in my TFSA thanks to savings and gaining profit from the stock market. I'm currently invested all of the 50k into CIBC (CM.TO) for the dividends. From reading the MMM posts and Canadian Coach Potato, both recommended Vanguard as one of the better options. I read the posts and could not understand how is it better when the dividends is much higher for CM.TO than Vanguards. Even with MER, the bank still comes significantly higher than the latter. Are the only reasons Vanguard is the preferred safer choice is because of the MER and diverification? I would think a bank stock would be quite safe. I do not understand so I'm hoping fellow Mustachians can help explain this to me. Thanks and much appreciated! =)

MustacheAndaHalf

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Re: Need Clarification on Canadian Bank Stocks Dividends
« Reply #1 on: October 16, 2016, 02:36:22 AM »
Morningstar shows S&P 500 having a better total return than NYSE:CM.  Looks like total return for 10-years has been +5% for Bank of Canada and +7% for S&P 500.  Total return includes both dividends and growth.

Mattzlaff

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Re: Need Clarification on Canadian Bank Stocks Dividends
« Reply #2 on: October 16, 2016, 07:24:00 AM »
Morningstar shows S&P 500 having a better total return than NYSE:CM.  Looks like total return for 10-years has been +5% for Bank of Canada and +7% for S&P 500.  Total return includes both dividends and growth.

Dividends aren't the only thing they're looking at.

But comparing a NYSE traded and a TSX traded may not be the best thing considering currency exchange rates.


Brokenreign

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Re: Need Clarification on Canadian Bank Stocks Dividends
« Reply #3 on: October 16, 2016, 07:36:46 AM »
On the aggregate, Canadian bank stocks have not had fantastic long-term returns. They tend to go through cycles of ups and downs but underperform the index on average. You're exposed to a lot of micro (company-specific) risk with one bank, especially a Canadian one. Remember that a lot of their business is in energy lending (currently suffering quite badly) and in mortgages, in what is viewed by many as the most over-valued real-estate market on the planet.

A high yield is often indicative of the market thinking that the share price may go down or that the dividend is unsustainable as yield is a function of payments/share price. I have been burned on three different occasions chasing yield, as I am not smart.

If you want yield, iShares offers a Canadian-denominated high-yield international dividend fund that yields about 4% (CHY or something like that). It's primarily US dividend payers (they hold the stocks directly -it's not a fund of funds) so I think it makes sense to hold in an RRSP so you don't get charged any withholding taxes. The MER is a little high at 0.6% and it's currency hedged. Normally the latter has been a drag on total returns but I don't have a lot of faith in the CDN dollar so it would be an additional benefit to me in this case.

Good luck!

MustacheAndaHalf

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Re: Need Clarification on Canadian Bank Stocks Dividends
« Reply #4 on: October 16, 2016, 10:11:32 PM »
Morningstar shows S&P 500 having a better total return than NYSE:CM.  Looks like total return for 10-years has been +5% for Bank of Canada and +7% for S&P 500.  Total return includes both dividends and growth.
Dividends aren't the only thing they're looking at.

But comparing a NYSE traded and a TSX traded may not be the best thing considering currency exchange rates.
Where did I say dividends are the only thing being looked at?  You seem to be quoting my post, but I only talked about total return. 

I got my annualized performance data from morningstar.com.  If you have data showing a different performance, feel free to post it.

RichMoose

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Re: Need Clarification on Canadian Bank Stocks Dividends
« Reply #5 on: October 17, 2016, 12:32:21 PM »
Hi, I'm 25 years old and currently have about 50k in my TFSA thanks to savings and gaining profit from the stock market. I'm currently invested all of the 50k into CIBC (CM.TO) for the dividends. From reading the MMM posts and Canadian Coach Potato, both recommended Vanguard as one of the better options. I read the posts and could not understand how is it better when the dividends is much higher for CM.TO than Vanguards. Even with MER, the bank still comes significantly higher than the latter. Are the only reasons Vanguard is the preferred safer choice is because of the MER and diverification? I would think a bank stock would be quite safe. I do not understand so I'm hoping fellow Mustachians can help explain this to me. Thanks and much appreciated! =)

While there is nothing wrong with disciplined dividend investing, it is quite risky to put all your eggs in one basket. With Vanguard, or many other low-cost Canadian listed ETFs, you are investing in a vehicle that holds the components of an Index. Index investing means diversification at a low cost. This reduces risk and is likely to increase long-term returns when compared to people who buy individual stocks.

Also, don't forget that dividends are only one component of return. Capital gains are also important. Unfortunately there is a lot of bad information out there that is biased to dividend based investing.

As far as Canadian banks go, they have been great investments for a few decades now. However, this has been in a period of generally declining interest rates, massive consolidation and reduced competition, declining taxation, and tonnes of positive legislation. While I believe that Canadian banks are generally good investments, I am skeptical that this long period of out-performance will continue for the following reasons: interest rates are close to as low as they'll ever be so they can only go up from here, there's not a whole lot of room left for consolidation without running into issues with the Competition Bureau, the appetite for ever lower corporate taxes by the voting public is starting to wear out, and the government is finally starting to realize that banks need to have more skin in the game so legislation is shifting out of the bank's favour. All this doesn't include the potential for increased competition by new internet-based financial companies.

Mattzlaff

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Re: Need Clarification on Canadian Bank Stocks Dividends
« Reply #6 on: October 17, 2016, 11:16:42 PM »
I quoted to agree with you

My bad