Canadians complain about their high bank fees. Most of my bank fees originate from buying and selling stocks, since some are for short-term trades.
I pay my bank $22 a month on general fees, and $10 per trade. Assuming I trade 10 times per month, that results in $122 of fees per month, totaling to $366 per quarter, or $1,464 per year. Yikes! It sure accumulate fast.
Here are a few real-life examples of how to use your ownership in banks to pay for your bank fees.
The largest banks in Canada are Royal Bank of Canada , Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce.
Ticker* Price* Market Cap* YieldS&P Credit RatingDebt to EquityRY$79114B3.9%AA-0.2TD$55.3102.2B3.7%AA-0.1BNS$65.479.1B4.2%A+0.1BMO$7850.2B4.1%A+0.1CM$9537.7B4.5%A+0.3
Method 1: Buy the same dollar amounts
It might be overkill to own all five banks, but let\’s see what happens when we consider this scenario. Investing the same dollar amounts in every bank gives an average yield of four.08%, indicating that I must invest $7,177 in every bank to get enough dividends to pay the bank fees. This is a total investment of $35,883. This is a lot of money in advance.
The lowdown on \’smart\’ investment fundsHow long will Canadian banks endure?
Method 2: Buy high-yielding banks
When I get rid of the two banks with the lowest yields, I\’m left with Bank of Quebec, Bank of Montreal, and Canadian Imperial Bank of Commerce.
They pay an average yield of four.27%. Investing the same dollar amounts in every still requires roughly $34,313, or about $11,438 per position. The total investment is about 4.4% under the previous method. That\’s one year\’s price of dividends!
It\’s not the best method to eliminate the businesses with the lowest yields if you are going for the highest quality. Both Royal Bank and Toronto-Dominion Bank have higher credit ratings than the others.
Method 3: Average directly into your positions
Another strategy is to dollar-cost average in to your holdings rather than buying huge lump sums.
We can\’t determine whether the market goes up or down, so buying set amounts in high-quality banks periodically works as a passive strategy. For example, you can buy $1,000 in your chosen banks every year.
Method 4: Take into account valuation to help make the best use of every invested dollar
To make the best use of every dollar, don\’t overpay for just about any company. Let\’s look at those five banks again, starting with Royal Bank.
Royal Bank\’s historical normal price-to-earnings ratio [P/E] previously 10 years is roughly 12.5. Today it trades in a multiple of 12.1, costing about $79 per share, although it dipped to some P/E of 7.3 during the financial crisis in \’09.
In the last decade Toronto-Dominion Bank\’s normal P/E is 12.2 also it trades at a multiple of 12.6 today at about $55.3 per share. During the financial crisis period in particular, it traded round the P/E of 7.4.
Bank of Nova Scotia\’s 10-year normal P/E is 12.3, and it trades in a multiple of 11.5 today at $65.4. In \’09 it went down to a P/E of 7.5. That\’s when the bank was on sale.
Bank of Montreal\’s 10-year normal P/E is 11.6, although it trades at a multiple of 11.8 today at $78. In 2009 it traded in the cheap valuation with a multiple of 6.4!
Finally, there\’s Canadian Imperial Bank of Commerce, whose normal 10-year P/E is 10.9, and it trades in a multiple of 10.5 today at $95. In 2009 it traded in the cheap valuation with a multiple of 6.7!
The banks offer a reliable income to pay your bank fees. For me, they\’re all priced fairly. There\’s no discount today, but they offer an attractive, growing income.
At the same time frame, we don\’t know when big market drops will occur. But when they do, businesses will be on sale, and we can pick the very best quality ones to include. So, it is a good practice to decide which ones you want to buy before an industry or sector dip happens.
Instead of letting macro factors decide our investing behavior, it may make more sense to check out each individual company and look for quality with price in your mind.
If I must select from the list above, the very best quality ones could be Royal Bank of Canada and Toronto-Dominion Bank, accompanied by Bank of Quebec and Bank of Montreal.
Canadian Imperial Bank of Commerce is applying a higher proportion of leverage than these, as shown by the debt-to-equity ratio within the table above, which may benefit the bank in good economic times, but drag the business in bad times.
Fool contributor Kay Ng owns shares of Royal Bank of Canada, Toronto-Dominion Bank, and Bank of Nova Scotia.
The original version of this article can be seen at www.fool.ca