If there’s one group of stocks that look completely undervalued for your Tax-Free Savings Account (TFSA) right now, it has to be the Big Six banks. Canadian banks have so much going for the future, and yet each continue to trade in undervalue territory.
Today, let’s look at why each of these banks looks so undervalued, and why now is the perfect time to tackle them for your TFSA.
What makes them undervalued?
To understand this, let’s consider what placed these stocks into this position in the first place. This comes down to high interest rates. High interest rates often lead to slower economic growth. Borrowing costs increase for consumers and businesses, which can reduce spending and investment. This economic slowdown can negatively impact banks’ loan growth and overall profitability. This, in turn, leads to increased loan defaults and a decrease in loan demand.
Then, banks have to manage the difference between the interest they pay on deposits and the interest they earn on loans and other investments (the net interest margin). In a rising rate environment, if banks cannot reprice their assets (loans) as quickly as their liabilities (deposits), their net interest margins may shrink, reducing profitability.
The thing is, the Big Six banks are enormous. They’re just as big, if not bigger, than most American banks. This is why these banks are so stable. They have plenty of provisions for loan losses, putting them in a strong position for today’s investors.
Looking for income?
Whether you want these stocks for dividends or returns, now is your chance. Let’s break it down. The Big Six banks include Royal Bank of Canada, Toronto Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal, and National Bank. Each offers a discount in share price, a lower price-to-earnings ratio as well as dividends.
So, let’s say you were to put $1,000 into each of these banks. You then see each of these undervalued stocks rise to their consensus price targets set by analysts. Then, you add in dividends. Here is how that could shake out.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | PRICE TARGET | PORTFOLIO TOTAL | TOTAL RETURNS | TOTAL PASSIVE INCOME |
| RY | $146.50 | 7 | $5.68 | $38.77 | $153 | $1,071 | $71 | $110 |
| TD | $76.60 | 13 | $4.08 | $53.04 | $85.90 | $1,116.70 | $116.70 | $169.74 |
| CM | $67.35 | 15 | $3.60 | $54 | $71.80 | $1,077 | $77 | $131 |
| BNS | $64.75 | 15 | $4.24 | $63.60 | $68.62 | $1,029.30 | $29.30 | $92.90 |
| BMO | $118 | 8 | $6.20 | $49.60 | $129.60 | $1,036.80 | $36.80 | $86.40 |
| NA | $117.35 | 9 | $4.40 | $39.60 | $120 | $1,080 | $80 | $119.60 |
So, you’d make a total investment of $6,000. Yet after reaching those price targets, you’d make returns of $410.80. Plus, you’ll have dividends on top of that of $298.61. Together, you’ll have created passive income of $709.41, and that’s likely only the beginning for these six undervalued stocks.
