With the volatility we’ve seen in the markets over the past few years, investors have become hesitant to put their money into the market. There are many good reasons to be cautious; more money printing, the U.S. administration is determined to lower the value of the dollar, scandals, and the banking crisis. These are just a few issues that keep many investors up at night.
Through all of this turmoil, an investor looking for income simply can’t get it in the bond market. This leaves obtaining income from the dividend yield. But so many companies have had shaky investments and many U.S. banks have poor assets on their books. The problem still leaves the potential in the loss of relative value with the world if the U.S. dollar declines.
One area an investor should look is outside the U.S. to foreign stocks that pay a strong dividend yield backed by a stable business model. I would suggest looking to Canadian bank stocks as just one example. Bank stocks in Canada have historically been very stable and consistently paid out a steady dividend yield due to the nature of their business. Bank stocks up north weren’t heavy in any of the more questionable business practices that U.S. bank stocks were engaged in, like massive subprime portfolios.
We recently received quarter earnings updates from two of the top Canadian bank stocks: Royal Bank of Canada (TSX/RY) and Toronto-Dominion Bank (TSX/TD). While both had earnings drop slightly from last period, this was during a time when there was extremely volatility in the markets. Both bank stocks have such a stable foundation in their core consumer and business lending foundation that it acts as a stabilizer to the capital markets divisions, enabling both to raise their dividend yield.
The dividend yield on both bank stocks moved up nicely. Royal Bank raised its dividend yield by six percent to now yield 4.04%. TD Bank raised its dividend yield by 5.9% to now yield 3.5%. While both raised their dividend yield, these bank stocks did highlight some issues in the market that may hit other financial firms harder.
They noted that the capital markets business did take a hit and that the next few quarters were extremely difficult to predict. Capital markets business is the portion involved in trading and investment banking. This area is more in line with the markets and is more volatile. But the overall portion of these bank stocks in capital markets is far lower than many U.S. bank stocks.
An investment in foreign stocks also diversifies your portfolio away from the U.S. dollar. This protects your wealth from a possible decline if the U.S. dollar were to fall, a nice bonus feature with a steady dividend yield. These bank stocks have had big moves, so I wouldn’t recommend buying right away. What I would suggest is to step back and look at the long-term picture. Historically, Canadian bank stocks have paid a solid dividend yield based on a business foundation of consumer and business lending. Pullbacks in these bank stocks due to temporary reasons, not structural reasons, should be looked as good opportunities to add solid, long-term blue-chips to one’s overall portfolio.