Profiting from Canadian Financials

Stocks representing the Canadian financial services sector have really been taken down lately in the midst of the U.S. credit crunch and concerns about the weakening U.S. economy's affect on Canada. The Canadian economy has been firing on all cylinders for a few years now, and the market seems to be anticipating a slowdown in activity in Canada due to the weakness of our largest trading partner to the south of us.

iShares CDN S&P/TSX Cpd Fnncls Indx Fnd [XFN/TSX], an ETF that tracks the Canadian financial sector is down 12% in the last year. So far, there has not been a real drop in earnings growth for these financial services firms, although it is widely expected by investors and by the companies themselves.

A drop in earnings growth has probably been priced into many of these banks, wealth managers and insurance firms, and consequently they are now offering up some pretty hefty yields. The yield is the percentage of your invested dollars that the company pays you annually, as a shareholder. Many of these companies have long histories of dividend increases, which can really benefit a shareholder in the long term, as one recieves an ever-increasing stream of cash. Many of these companies have increased their dividends paid to shareholders at compounded rates in the 7-12% range long term. This type of annual raise really trumps the typical 3-5% raise in employment income that one might expect slaving away at a 9-5.

Where to put your money? If you have a hoard of cash that you won't be needing for at least 3-5 years then why use a saving account where your capital just gets eaten up by inflation, and the income you receive gets taxed accordingly? Dividends from Canadian corporations are taxed less than all other forms of income. The income you'll recieve in the form of dividends from these firms is only half the story, as in the long term you should also garner some capital gains from selling the stocks.

Selected Popular Savings Account Interest Rates in Canada:

ING Direct 3.65%

President's Choice Financial 3.75% (balance over $1,000)

Some Selected Canadian Financial Institution Yields on Common Stock:

Bank of Montreal (BMO) = 5.2%

Royal Bank of Canada (RY) = 4.0%

Bank of Nova Scotia (BNS) = 3.9%

IGM Financial [IGM/TSX] = 4.4%

Great West Lifeco [GWO/TSX] = 3.7%