After a two-year hiatus on raising dividends, Canada’s top six banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada — are set to resume the practice this week.
Even with the two-year moratorium brought about in March 2020 at the outset of the ongoing COVID crisis, Canadian banks out-yielded the global sector median 3.3% to 2.5%. Despite not being able to juice dividends or buybacks, Canadian banks have hit record highs, driven by extremely favorable earnings. The earnings came about as reserves set aside to cover loan losses did not have to be tapped despite anticipated trouble on that front due to the pandemic.
“It’s going to be a significant (dividend) increase, and will help them reduce excess capital on their balance sheets,” said Steve Belisle, portfolio manager at Manulife Investment Management.
Earnings are expected to jump about 37% from the year earlier. Philip Petursson, chief investment strategist at IG Wealth Management, sees an acceleration in loan growth is expected, noting that increased savings by consumers and businesses throughout the pandemic have increased purchasing power. “It’s really hard to see where the warts would be on the banks’ earnings,” Petursson added.
With inflation on the horizon and income increasingly hard to come by, investors can take advantage of Canada’s rosy bank picture through a number of ETFs.
The Franklin LibertyQ Global Dividend ETF (FLQD) has both Toronto-Dominion Bank (TD) and the Royal Bank of Canada among its top holdings, at 2.04% and 2.03%, respectively. The iShares International Dividend Growth ETF (IGRO) is particularly well-positioned to benefit from the dividend hurricane being unleashed in Canada’s banking sector, with its top holding being TD at 3.43% and Royal Bank of Canada, Bank of Montreal, and Canadian Imperial Bank of Commerce all being among its other top holdings. Finally, the Royal Bank of Canada is a top holding for the FlexShares International Quality Dividend Defensive Index ETF (IQDE). IQDE is positioned to have lower market beta, meaning that if the new variant upends things and creates further volatility, IQDE could be a good defensive play.
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