Head For The Border
As I sit in my igloo eating my reindeer pie and watching the hockey game, I often reflect on how great it is to be Canadian. We have electricity, running water, and my town even has access to a computer, thus enabling me to write this blog post. Actually, the picture I paint is more of a humorous stereotype than actual reality. (Although I do watch a lot of hockey). Canada is kind of like the United States in some respects (like free market, democracy, and consumers who like to spend money) and very different in other ways (more government-regulated industries, higher taxes, and universal health care).
If you are looking to diversify your portfolio, one of the best ways to do it is to pick stocks that are geographically diversified. Canada offers one of the best industries to invest in, and it could be very attractively priced considering the sub-prime mortgage meltdown that has plagued the U.S. recently.
I am referring to Canadian bank stocks. “Financial services?!†you may cry in disbelief. However, I ask that you consider the following:
- Many Canadians have never heard of “sub-prime†mortgages before now. Many of us didn’t even know such a product existed—all Canadian mortgages are either 10% down or are backed by mortgage insurance to protect the banks. This means that the Canadian banks have very little exposure to the sub-prime crisis in the U.S, and very little chance that defaulted mortgages will financially impact Canadian banks.
- The Canadian banking industry is regulated. There are only six big banks in the entire country: TD Canada Trust, Royal Bank, CIBC, Bank of Montreal, Scotiabank, and National Bank of Canada. This industry has high barriers to entry.
- The banks are all profitable. Bank of Montreal and Royal Bank announced earnings over the past year that were so high, they have become a source of embarrassment for the company. There has been some public pressure for the banks to reduce their user fees because the bank’s earnings have been almost ridiculously high.
- Canadian banks pay a regular dividend. The earnings for the big banks are steady and somewhat predictable, and this has resulted in ever-increasing dividends over the years. Royal Bank, for example, pays a 3-4% dividend—and it’s more than doubled in the past 5 years.When a quality company’s stock is dragged down by the overall market or unrelated factors, it could be a great bargain. For many Canadians, the bank stocks form a core holding in almost every major portfolio because of their cash-generating attributes and relatively low risk. With the sub-prime mess in the U.S., Canadian big banks could be just the thing for that conservative section of your portfolio.
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Great post Karl. Being a fellow proud Canadian, I agree that the big banks are a great investment. Not only have they paid a consistent dividend, they have been consistently INCREASING their dividends.
Back to the igloo..
FT
Pretty interesting. I didn’t know too much about the Canadian financial sector, but you don’t live in igloos?
[...] why it’s great to be Canadian? At least they have socialized medicine. And the [...]
Next thing you know you are going to tell me Canadians aren’t raising comedians to take over the world, wait Candadians already did that.
On the sub-prime side, our loans in the US require mortgage insurance if you don’t put down 80%, BUT you can get a “piggy-back” loan from another lender to cover the remainder at a much higher rate. We did that on our first house and ended up putting down only 5% in the end. After the house appreciated, we refinanced and had 20%+ equity with only one loan.
In looking at the history of some of the Canadian banks it appears that they have proved to be a very good investment. Nice dividends paired with nice capital appreciation.
Don’t forget to buy Coventree (COF). That Canadian financial is on fire!
Some of the banks did put thier money into sub-primes, but our bank industry is much different and the big six are more likely to do very well (and if they don’t, they’ll get bailed out), so investors and owners of the stock can relax a bit (at least in comparison to those risky yankees
).
That said, I did find one error in your article. While our personal taxes are rediculously high and a big hinderance, our corporate taxes are set to drop to 15% by 2012 and we will have the lowest corporate tax rate out of the entire G7.
Oh, and investing in Canada kicks butt cause its one of the largest countries on earth with tons of resources… and our government has SURPLUSSES and is PAYING DOWN DEBT while the rest of the industrialized world is being mortgaged away.
I also forgot to mention, due to our big surplusses our taxes are being lowered each year and things continue to look better for us in this material world (which we own many of the materials).
We do more considerably more trade with the US than China does and China has 1,300 million people slaving away… we have a mere 35 million people.
Wow solid read Kyle! I never really looked in the CA banking market, that is some very tough barrier to entry! It would be interesting to know how many US citizens/investment groups have sizable stakes in those 6 banks you mentioned.
I meant Karl, sorry man
The day I put my hard earned money into a socialistic country, will be a cold day in blazes.