Economic trends and current situations:

Canadian Banks Outpace Fixed Investments

Summary

  • Review of interest rates, impact on investments, and an introduction to Canadian bank shares.
  • Saving accounts and government issued bonds are non-ideal against current inflation rates.
  • Review of several banks who offer dividend yield rates higher than current inflation rates.

As the global economy continues to show slow growth rates, central banks have moved to avoid hikes in interest rates. Low interest rates are expected to keep populations, businesses and governments spending new capital, while an increase in interest rates could deter new consumer spending and business cap expenditure spending. From a high level this represents the current situation in America and other industrialized nations. It is in my opinion that the current period of prolonged low interest rates is far from over and could easily carry on to the end of the decade. The current period of prolonged low interest rates bring the possibility of increased inflation which can greatly impact the value of cash. Canadian banks have traditionally been viewed as income-generating investments paying handsome dividends while growing profits have recently seen an increase in appetite for their stocks which is partially related to low interest rates.

As retail investors lack alternative investment opportunities that allow them to beat inflation, they have turned high yielding dividend shares as an option. As a flood of new investment has poured into the banking sector, shares prices have rallied which has in turn decreased dividend yields but increased capital appreciation. In parallel with this market activity the banking industry has moved to continuously increase dividends to keep dividend yields at an attractive rate. Today, Canadian banks are paying dividends which yield between 3.5-4.5% depending on the risk associated with the investment and time of entry. For example, an ideal time to open or build a position in an income-generating stock is during a market correction as yields offered can significantly improve.

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