I am thinking about buying shares of a Canadian bank now that prices have fallen. Is there any bank that looks especially attractive to you right now?
If you don’t already have exposure to Canadian banks, this may be a good time to take the plunge. Share prices have plunged more than 20 per cent, on average, over the past 18 months, and dividend yields – which move in the opposite direction – now average about 5.5 per cent for the Big Five.
For what it’s worth, analysts are especially fond of Toronto-Dominion Bank , which has 11 buy recommendations, followed by Bank of Montreal with 10 and Royal Bank of Canada with eight. Canadian Imperial Bank of Commerce and Bank of Nova Scotia
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are well down the list, with two and one, respectively. If your primary consideration is dividend yield, the two laggards may still be worth a look. CIBC and Scotiabank both yield in the neighbourhood of 6.5 per cent, befitting their higher risk profiles. There’s a school of thought that buying the least loved banks is the way to go, as they presumably have a greater chance of rebounding. However, history has shown that this is a not a slam dunk. Moreover, with the economy potentially heading into a downturn and banks raising their provisions for bad loans in their latest earnings results, there’s an argument for accepting a lower yield in exchange for owning one of the higher-quality banks.
All of that said, predicting how individual bank stocks will perform is a mug’s game. Rather than putting your money on a single horse, you might be better off spreading your bets around by buying an exchange-traded fund that provides broad exposure to the sector. One example is the BMO Equal Weight Banks Index ETF , which owns all of the major banks in roughly equal proportions and charges a reasonable management-expense ratio of 0.28 per cent. Especially if you don’t have any bank exposure already, an ETF will give you diversification to help control your risk.