Tuesday, 21 June 2016

Canadian Bank stock dividends - are they really that good?




At a recent family function.  Someone came up to me and asked me if I liked to talk about investing and  personal finance.  I said of course. Well I got cornered and he has been investing for years now and how you can never go wrong with bank stocks.

"They pay a healthy quarterly dividend come rain or shine and they keep hiking their dividends year in year out".  Combine that what a decent capital appreciation, and you can't do any better.

This is just a quick summary of our conversation that must have taken place in thousands of living rooms, bars, and anywhere else people meet to talk about how things are going in their lives.  Bank stocks sometimes come up, after all banks are in our everyday lives.

The above statements are somewhat true, Canadian bank stocks are in my opinion, almost the perfect dividend stock to own for the long term.  But think deeper.

Like a herd of sheep, we simply refuse to see the banking industry for what it really is, its an industry that is working harder every day to take your hard earned money.  Almost in a silent way.  They make money on your mortgage, your bank accounts, your investments like mutual funds, commission fees for trading, even your payroll deposit, yes that right, they make money on your payroll deposit  Let's face it, everyone uses something at the bank and you can't escape that part of everyday life.

Yet, we give the banks our hard earned money and they pay it back to us in dividends?  And we think because we get this dividend, its good?  It's almost like the money the bank makes, its paying it back to you in dividends.  That's if you own the stock and not just invest in mutual funds.  It's almost like the ultimate ponzi scheme.  Some might go as far to say the banks are trying to suck and blow and the same time.  If this offends you because you are a banker or are friends with a banker, I apologize.  The thing is, every investment comes with a  strings attached.  It just so happens, the banks have a long string into our lives.

A quick look at the 2015 Royal Bank of Canada annual report shows in their income statement that fees totalled $7.8 Billion.  How much did Royal bank pay out in dividends in 2015?  $4.6 Billion.

If you own Royal Bank stock and you bank with Royal, it's important that your mindful of the the fact that your relationship with the bank and the fees paid to maintain that relationship more than covered the dividends you back from your investment in their stock.  I am not just picking on Royal Bank, if you go through all the Big Six bank's annual statements, you will see something similar.

Now recent articles about banks hiking their fees, just seem wrong.  Most consumers will be complacent about the increase, they will continue to bank with their bank.  Now not all Canadians own a bank stock, so if you do not own any bank stocks, you are behind at this point, as investors who own bank stocks have at least gain somewhat of a foothold with their financial establishment.

Now I hear what you are saying, its like a cash back or a discount on my fees I pay because of the dividends they get, if thats the case then so be it.  But remember that when you receive a dividend from the bank, it may not be exactly what you think it is.