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It's not often the big banks get skunked, but it happens.
Looking for a place to invest a $25,000 inheritance a year ago, the Big Five banks seemed an obvious choice. The outlook for the stock market at the time was uncertain and the solidity of the banks was appealing. The banks were fine in the past 12 months, but the S&P/TSX composite index was all that and much more. The final tally for the year to Oct. 3: index 21.6 per cent, Big Five banks 7.9 per cent. Skunked - that's the word for it.
The problem wasn't the banks, per se. The sector as a whole had to contend with the threat of rising interest rates for part of the past 12 months, but there were no other significant challengers. Rather, the issue was that investors loved Canadian Imperial Bank of Commerce in the past year (up about 20 per cent), they liked Royal Bank of Canada and Toronto-Dominion Bank (up and 12 and 10 per cent, respectively) and they kind of hated Bank of Montreal (down about 4 per cent). Mix the good with the bad and you get your pipsqueak 7.9-per-cent return.
Wait, the banks as a whole actually did a little better than that. Add in the yield from their dividends and you end up with a total return of about 11 per cent.
To be fair, adding dividends into the return for the S&P/TSX composite gets you 24.7 per cent, which means the banks still vastly underperformed.
OK, the banks weren't the best choice over the past year to grow an inheritance. A few years from now, though, it's a good bet that the banks will look just fine. Truth is, short-term results are a poor way to measure the results from investing in banks. You need to hold for several years - let's say five, at least - so that the rising flow of dividends from these stocks can have an effect.
Take Royal Bank of Canada, for example. Its one-year price gain is 12.3 per cent, which looks good in the larger scheme of things but still lags the index by a lot. The more positive news for owners of RBC shares is that the bank has boosted its quarterly dividend twice since the end of last October - to 50 cents per share from 40 cents. Shares bought last Oct. 31 at the day's high of $50 would now yield a nice, round 4 per cent based on the current annualized dividend of $2. Even if RBC shares do nothing in the next year, you've still got a return that's better than a money market fund.
Bank stocks are under tremendous pressure to raise dividends, even when things aren't going great for them. BMO's been having problems building market share in the domestic retail banking market, and its losses in commodity trading have been well documented. Still, the bank has managed to increase its dividend to 70 cents a share each quarter from 65 cents at the beginning of the year. That's what you get from a slumping bank stock.
Let's get real about the banks. They may not have distinguished themselves in growing that inheritance from Uncle Horace over the past year, but they're about as rock-solid a place to invest an inheritance for the long term as there is in the Canadian stock market. Let's just see how Uncle Horace's money is doing 10 years from now.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.