If you’re willing to park your money in savings accounts or guaranteed investment certificates (GICs), offered by the big Canadian banks, to earn interest income, you should be open to the idea of getting consistent dividend income from the stable banks. Here are some of the differences between the two investments.
Source: Getty Images
Traditional GICs offer income and predictability
Traditional GICs offer income and predictability. For example, currently, the best interest rate for a one-year traditional GIC is about 5%. Essentially, you would lock in your money for one year and get the principal back as well as 5% in interest income at the end of the period.
A more novel type of GIC is the market-linked GIC, which also provides the safety of your principal. On top of that, it also offers the potential for higher returns based on the performance of the underlying index it’s linked to. It may also offer a minimum interest rate (that’s lower than the traditional GIC) but a minimum guaranteed total return that typically outperforms traditional GICs. However, being invested in a market-linked GIC, you will get lower returns than if you had invested directly in the underlying index (because there was a tradeoff for the principal safety guarantee). The market-linked GIC may be suitable for conservative investors with a three-to-five year investment horizon.
Banking on stability with Canadian bank stock dividends
The big Canadian bank stocks are some of the best blue chip wealth creators. You won’t get rich over night, but you won’t have to watch your investment like a hawk either. Importantly, they are sources of consistent dividends.
In fact, they tend to increase their dividends over time so that in the long run, you are able to earn more income than in GICs – and your investment appreciates. So, long-term investments in the big Canadian bank stocks generally outperform the same investment in traditional GICs.
You can try to buy the big Canadian bank stocks on dips to target a higher initial dividend yield and higher returns. Typically, bank earnings fall during recessionary periods or highly uncertain economic times due to higher loan loss provisions. These are also periods when you can find opportunities to buy the bank stocks trading at relatively cheap levels.
For example, Toronto-Dominion Bank (TSX:TD) stock is a reasonable buy here. The stock has been a laggard and has actually declined about 3% in the last 12 months. Last fiscal year, the bank increased its adjusted revenues by 12% to $51.8 billion. However, in a higher interest rate environment, the bank witnessed its provision for credit losses rising 175% to $2.9 billion, which weighed on earnings.
Its overall fundamentals remain solid, though. Adjusted earnings were resilient with a 2% decline. And the adjusted return on equity was 14.4%. Consequently, it was able to make a healthy dividend increase of 6.25% in November.
TD is a blue chip stock. It expects 2024 to be a challenging year, which is nothing its large and resilient business can’t take on.
Its recent price was just under $85 per share, resulting in a dividend yield of 4.8% and a price-to-earnings ratio of about 10.6, which is a 9% discount from its long-term normal valuation. With this dividend yield, investors don’t need a lot of price appreciation to beat GIC returns.
