Many income-oriented investors seeking yield in today’s environment of rock bottom yields have gravitated toward specific equities that provide dividend yields well in excess of bond yields today. This strategy is one which has been, hands down, the best approach to battling low interest rates. The “TINA” (There Is No Alternative) trade has continued to drive capital inflows into equities, further driving down yields and increasing valuations in the sector accordingly.
Canadian banks are among the equities that have presented investors with perhaps the most stable high-yield options for quite some time. The group of Canadian banks still offers investors with a diversified average yield around 4.5%, or 10-times the long bond yield in Canada, a nice premium to say the least. At the trough of the pandemic-related panic selling we saw in March, this average yield was as high as 6.6%.
For confident investors who bought the bottom and locked in that 6.6% yield, the capital appreciation which has come with the most recent bull market in equities has provided a nice portfolio win. I expect the momentum in this sector to continue, and would encourage investors interested in owning the Canadian banks to consider doing so through and exchange traded fund (ETF).
One great ETF in this space is the BMO Covered Call Canadian Banks ETF (TSX:ZWB). This ETF is focused on the big six Canadian banks, and also has a covered call overlay, providing income-oriented investors with an extra layer of income (while limiting some of the capital appreciation upside, which can be okay for investors concerned primarily about dividend income).
Invest wisely, my friends.