Yahoo Finance Better Buy: Canadian Bank Stocks or GICs?
Written by Joey Frenette at The Motley Fool Canada
It’s a strange time to be a new investor, with GIC (Guaranteed Investment Certificate) rates now in a better spot to compete for Canadian investors’ dollars. Indeed, some of the more bountiful GIC rates are eclipsing the 5% level. That’s a very high risk-free rate, making it tougher for more conservative investors to justify taking risks, even with low-cost defensive stocks boasting large yields.
Though I do think every investor should give today’s slate of GICs a look, I’d encourage them to not neglect the higher-yielding blue chips. At this juncture, the banks look quite competitive, as they move on from a volatile start to 2023.
The second half could be more prosperous for the bank stocks
The broader basket of banking stocks has been stumbling around wildly this year. Back in March, when a few regionals in the U.S. went down, it was not easy to be a bank shareholder.
TD Bank (TSX:TD) and Bank of Montreal (TSX:BMO) were two Big Six banks that felt their U.S. exposures drag them down in the first half. And though both banks were profoundly well capitalized, it seemed like both names could not be more unloved. Not when it seemed like a new regional bank was going to implode on the weekly! Eventually, nerves calmed, the Canadian banks settled down, and markets as a whole began climbing higher again.
Indeed, many investors have come to terms with higher interest rates. The tech sector’s recent rebound seems to suggest the market is already looking to what happens after rates peak. Indeed, falling inflation could leave central banks, like the Bank of Canada, with more options other than to hike.
In any case, I don’t think investors should try to predict the Bank of Canada’s move meeting by meeting. Instead, it may make sense to consider the best move right now, given the range of possibilities.
If rates stay higher for longer, the bank stocks may be worth the price of admission, even relative to bountiful GICs. However, if rates move lower from here and a recession can be avoided (for the most part), banks also look poised for recovery gains. Finally, if rates keep moving higher and the recession hits harder than expected, banks could easily keep tumbling from here. Of these scenarios, I view the first as the likeliest.
Could Canadian bank stocks have an edge over GICs?
Technically, elevated rates should be viewed favourably by the big banks, as they look to bolster margins. However, a rate-induced recession is a potential downside, as it could bring forth provisioning activity. One has to imagine that a recession has already worked its way into the share price here, though. Further, the U.S. regional bank failures from earlier this year may very well be the scariest moment for investors.
Bank stocks can certainly seem like reckless plays to buy on the dip when the tides go out on the economy. When fear spreads through the banking sector, it can get very lonely to be a contrarian.
In any case, I believe the bravery of dip-buyers will be rewarded considerably once the coast begins to clear and headwinds begin to show signs of diminishing.
TD Bank and Bank of Montreal offer dividend yields of 4.58% and 4.83%, respectively, at the time of writing. While GICs may seem like the safer bet, I think upside-seeking investors may wish to nibble away at the banks, as industry gloom abates.
Better buy: GICs or bank stocks?
I think it’s best to own bank stocks and GICs together in this climate. But if I had to choose one to outperform over the next year, my money would probably have to be on the banks. They’re too cheap here, and I think the recession may not be as bad as expected.
The post Better Buy: Canadian Bank Stocks or GICs? appeared first on The Motley Fool Canada.
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Fool contributor Joey Frenette has positions in Bank Of Montreal and Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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