The financial sector was on fire in 2016. Immense annual gains of 50%, 60%, and greater were pocketed by investors who caught the trend.
Don’t worry, I’m not talking about speculative fintech or other risky high-tech financial names.
Hopefully, your portfolio captured some or all of this historic upside.
It’s Not Too Late to Profit on Financial Stocks
If you missed riding the uptrend higher, or simply want to have a chance to pocket additional gains, it’s not too late. I have identified five solid financial stocks that still have tremendous upside potential and pay hefty dividends.
Amazingly, these stocks trade in a market that has never had a financial calamity since the 19th century. This industry remained stable during both the Great Depression and the global banking crisis of 2008.
This market, the Canadian banking industry, never experienced a financial crisis due to a myriad of reasons that are beyond the scope of this article. Suffice to say; the Canadian banking system is widely considered to be a bastion of stability.
In comparison, the United States has suffered through a dozen-plus banking mishaps during its history. Some academics point to the fact that banking regulations are used as political leverage in the United States’ two-party system as the reason for relatively high financial instability.
The major Canadian banks, however, severely lagged the performance of the U.S. banking sector in 2016. Canadian banks returned 26% as a group, which is nothing to sneeze at, and this could mean there’s still room for growth north of the border.
Here’s why I think Canadian banking stocks remain a solid buy opportunity:
1. Return on earnings
Canadian banks as a group achieve about 15-16% ROE (return on equity), which places them in the same category as major internet names.
2. Stability of earnings
Canadian bank earnings have dropped by just 14% during the last recession while U.S. bank stocks have given up an average of 46%.
Banks in our neighbor to the north pay between 3% and 5% in dividend yields.
Canadian banks are the only sector to outperform Warren Buffet’s Berkshire Hathaway over the past 20 and 25 years.
5. Low Volatility
The Globe & Mail’s Globe Investor column did a study on the best low volatility stocks for turbulent times. The study was conducted by analyzing stable stocks comprising the PowerShares S&P/TSX Composite Low Volatility Index ETF, which tracks the index of the same name.
The index is weighted with the least volatile stocks ranked the highest. Canadian banks are the highest rated stocks on the list. The study also revealed that the stocks included have an average dividend yield well over the market average, while price-to-earnings ratios are lower than the S&P/TSX average.
Here are 5 leading Canadian bank stocks to consider today:
1. Royal Bank of Canada (NYSE:RY)
This stock is higher by over 5% this year. Price has hit resistance at $100 per share, setting up an ideal break out entry opportunity above the $100 level. Boasting a market cap of $140 billion, the company throws off a 3.6% annual dividend yield.
2. Toronto-Dominion Bank (NYSE:TD)
Shares of this leading bank name are lower by just over 1% this year but the stock is trading higher by 10% in the last 52 weeks. Enter on the pullback in the $48.50 per share zone. The $122 billion-plus market cap and 3.7% yield create a favorable long-term investment picture.
3. Bank of Nova Scotia (NYSE:BNS)
This $7 billion market cap bank has inched higher by 2.3% this year. The stock yields a hefty 4.1% and is trading a little less than $57 per share. Wait for a breakout above $57.20 to enter long.
4. Bank of Montreal (USA) (NYSE:BMO)
Shares are trading near $73.35, higher by around 2% year-to-date. A $64 billion-plus market valuation combined with a 3.6% yield makes this a strong candidate for your long-term portfolio. Enter long on any pullbacks.
5. Canadian Imperial Bank of Commerce (USA) (NYSE:CM)
This regally named bank, founded in 1961 and headquartered in Toronto, is my favorite stock of the five. Boasting a $45 billion market value and throwing off a nearly 5% dividend yield, this stock provides the both income and considerable growth opportunity. Enter long on a breakout of $83.33 per share.
Risks To Consider: The Canadian economy may be slowing down. Talk of a real estate bubble and financial troubles may prove accurate. If these worries prove to be true, Canadian banks will suffer. Always use stops and position size responsibly.
Action To Take: Consider adding a few Canadian banks to your portfolio.
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