Where to Find the Safest, Most Sustainable Dividends in the World
By Graham Summers
Banking in Canada is nothing like banking in the U.S.
The U.S. banking industry is split between big players – Bank of America, Citigroup, etc. – and hundreds of regional and smaller banks. Barriers to entry are minimal... even Magic Johnson and Janet Jackson own a bank. And domestic banks get a lot of competition from international players moving in and setting up shop.
Up until 1989, however, it was illegal for foreign banks to control more than 15% of the Canadian banking market. Additionally, no company can purchase more than 20% of a Canadian bank's voting shares. In fact, any time an investor acquires more than 10% of a Canadian bank, the acquisition has to be personally granted approval by Canada's minister of finance. Banking in Canada is a fully government-backed cartel.
So it's been virtually impossible to break into the Canadian banking market in any significant way. Between 1987 and 1999, only two full-fledged banks were chartered in Canada. In contrast, the U.S. chartered 207 new banks in 1997 alone.
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The Canadian banking industry has been around since 1817, when nine former militiamen from the War of 1812 formed the Bank of Montreal. Protected by government legislation for 150-plus years, Canada's oldest and biggest banks – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and Bank of Montreal (collectively called the Big Five) – have a stranglehold on Canada's financial sector.
The Big Five control 70% of all deposit-taking assets in Canada, 80% of small business lending, more than 80% of the investment brokerage industry, all but two of the large trust companies, and the majority of consumer-credit and mortgage-lending firms. They're the largest, most profitable companies in Canada.
In 2006, the Big Five generated close to $19 billion in earnings: an all-time record. That breaks down to $575 in earnings for every human being living in Canada.
As is the case with most banks, the Big Five make their money on the spread between the interest they pay on deposits and the interest they make lending money. The average spread for the Big Five is between 7% and 15%.
In addition, their profits have increased on the world stage thanks to the strength of the Canadian dollar: The "loonie" has risen 56% against the U.S. dollar in the last five years.
The Big Five are taking advantage of the situation to expand into other markets such as the U.S., South America, and the U.K. I passed by several branches of the Royal Bank of Canada down near Asheville, NC, during a road trip this year.
More importantly for shareholders, a huge chunk of the Big Five's profits goes right to investors in the form of massive dividends. On average, the Big Five pay out 40%-50% of earnings. In 2006, this amounted to $7 billion. Their current yields are substantial:
Bank |
Current Yield |
Bank of Nova Scotia |
3.4% |
Canadian Imperial Bank |
3.6% |
Royal Bank |
3.8% |
Bank of Montreal |
4.8% |
Toronto Dominion |
3.3% |
|
This won't change either: Paying out dividends was actually written into the banks' charters back in the 1800s. The Bank of Montreal has paid dividends every year since 1918.
Drawn by these payouts, most Canadian pension plans have large portions of their portfolios in bank shares. The Ontario Pension Board has 23% of its Canadian equity holdings in Canada's banks. For the Saskatchewan Pension Plan, it's 22%. And the Nova Scotia Public Service & Teachers Pension Plan has 19% of its Canadian equity holdings in Canadian bank shares.
If you're looking for safe, sustainable income plays, you can't do better than this. We're talking about a government-backed cartel that pays out nearly half of its profits to shareholders.
Good trading,
Graham Summers
P.S. If you'd like more information on Canadian banks, including which ones my analysis indicates are the very best investments, then click here.
