Beat The Banks

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Dividend Earner

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You must have heard of the Beat The TSX strategy by now, and while it has its merit, it often is inconceivable for investors to sell their entire portfolio every year and buy back only 10 stocks. Considering the average DIY investor holds over 20 stocks on average, it’s a pretty tough strategy to follow through.

Now, if you think about it, most investors hold the big banks. The big six banks also hold an oligopoly which makes them like each other and yet different, but which bank to buy is often the biggest question an investor has.

If you were to follow the Beat The TSX strategy, you would pick the highest yield bank but not in this case. It’s not about the highest bank dividend yield, it’s about the bank with the yield above its 5-year average yield.

The highest yield bank provides you with the highest income but not necessarily the highest total return. If we focus on the market yield crossing the 5-year average yield, then we also find a potentially undervalued bank.

Total Returns With The Big Banks

While the big banks have an oligopoly, their business ventures have their stocks move in slightly different direction leading to opportunities while you collect the dividends.

Dividend investors are normally attracted to the dividend of the big banks which is a good start but wouldn’t it be nice if you could also make a profit on the stock? While you could just call it a day and buy the best performing banks as seen below, with a little more work, you could find the bank out of favor if any.

Bank Total Returns

Which bank do you wish you held? I was personally late to the National Bank party, but I got on the train and have been profiting from it. Funny enough, when we start investing, our love/hate relationship with the banks often steer our decision but the numbers speak for themselves regardless of your personal banking experience at your local branch.

Finding An Out Of Favor Bank

We won’t use short-selling as an indicator, or the RSI, instead we will use the 5-year dividend yield average. If short-selling is noisy enough, it will impact the 5-year yield trend.

With stable blue-chip stocks, the dividend yield tends to fit a range over the years, and if you invest in banks, you know the dividend yield range of your favorite bank. The 5-year yield average allows you to see when a stock is dipping in a way.

Obviously, we are assuming you are happy with any of the big six banks, but you can narrow your choice if you want. For example, you might not be interested in Scotia Bank because of the new CEO being from outside the industry, or you might be excited about this fresh perspective.

5-Year Timing vs Dollar-Cost Average

The idea behind the Beat The Bank strategy is to increase your yield and your return at the same time.

When you buy your bank with a dividend yield over the 5-year average, it’s an anomaly of sort which implies the dividend either increased faster than expected or the stock price has gone down.

Most of the time, it’s the stock price that has gone down which means you can get a larger dividend yield and a lower price at the same time.

Sticking to your bank holding and dollar-cost averaging means you slowly compound your investments. On average, with the banks, what I have experience is an annual rate of return over 10%, now the question is if you can squeeze a little more out of your investments while increasing your income (possibly).

If you want to buy and hold, well, you can see which banks to hold. If you want to take advantage or dips, maximize returns, the 5-year yield is critical. Very few service offer access to it and to assess if you are over or under it.

The Dividend Snapshot Screener is one of the few services that can do that for you.

The strategy isn’t a short-term play for weeks or a few months, it can last a couple of years. In the meantime, you do want to get setup with dollar-cost averaging with the bank you decide to hold.

Why Beat The Banks?

First of all, chances are you will invest in one of the big Canadian 6 banks. So, why not look for the right opportunity at the right time.

Considering the big six banks tend to trade consistently, it makes them the perfect stocks to apply a strategy like this one which is essentially an optimization over dollar-cost averaging.

Lastly, the banks don’t have to be a buy and hold forever. You can move between them. Make your money work for you!