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. â€œFinancial services?!â€ you may cry in disbelief. However, I ask that you consider the following:
- Many Canadians have never heard of â€œsub-primeâ€ mortgages before now. Many of us didnâ€™t even know such a product existedâ€”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 bankâ€™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% dividendâ€”and it's more than doubled in the past 5 years.When a quality companyâ€™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.