Thoughts on big bank dividend paying stocks such as royal bank and TD?

Hello,

This year I’ve done quite well with mining ETF’s and I’ve finally setup my TFSA and RRSP accounts, deposited funds that are allowed on my CRA account.

I’ve made it quite diversified but I still feel that I may have added more than I may need to on the financial side. These are the common dividend stocks such as RY, BMO, BNS, TD, GSY, POW and etc.

I was quite happy with the portfolio but I read an article just few minutes ago, which is obviously not really a huge surprise, that financial stocks such as royal bank could hit hard when there may be a realization debts borrowed can’t be paid per se.

What are some of your sentiments? I completely forgot about covid effects and just focused largely on the dividend paying stocks including REI.UN, CSH.UN and utilities.

The goal was to set up and forget it for awhile but also if there may be significant dip foreseen, do you think I should sit on the side for financial stocks? Or just add and average out. I’ve spent quite some time to do all this just to wonder if this is the best time to get financial stocks – my train of thought was it was already dipped enough.

Super confused now! haha

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Asked on August 3, 2020 5:50 pm

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Thank you for your response, appreciate it!! 🙏

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Posted by Daniel Shin

Answered on August 4, 2020 5:12 am

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Hi Dan,

The stocks you've mentioned - RY, BMO, BNS, TD, GSY and POW are all solid financial stocks. In the short-to-medium term, I would not expect them to do much. We are in an environment of low interest rates, and the economic shutdown was (and remains) a big risk to these financial stocks. This led to increased in provision for credit losses (PCLs) last quarter.

I do however, think that most of the bad news is baked in. Could they dip more? Absolutely, if we enter into another economic shutdown and a second wave of COVID-19 hits us hard, then it is likely all stocks will dip. In fact, we could see another crash like we did in March. If that happens, I would not expect these financial stocks to crash has hard as they did back in March because they still haven't recovered to any great extent. But could they drop further? Absolutely.

Such is the risk with investing - we don't know what the future holds. We can only base ourselves on the information that is in front of us. Today, that means that we are slowly re-opening the economy and that is good news for these financial stocks. The more people that get back to work, the better. Likewise, the massive spike in PCLs we saw last quarter is likely to be a one-time event. Since PCL's are forward looking, they were likely to be reflective of the worst case scenario at that time. What we've seen thus far from earnings - it isn't as bad as expected.

Case point, we've seen a couple of financials reports earnings already - EQB and IAG. Both revised PCLs downwards from last quarter - a sign that the majority of defaults are now in the rear-view mirror.

All-in-all, in two or three years from now, shareholders should do quite well with their financials. From what I can tell, all the ones you've mentioned have a dividend that is well covered, and I see no reason to be concerned. In the short term - expect volatility and flat growth. It will however, be entirely dependent on where the economy goes from here and if the pandemic leads to another big round of shutdowns.

Hope that helps!

Mat

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Posted by Mathieu Litalien

Answered on August 4, 2020 4:50 am

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