Canada’s banks were cautioning investors for some time about a slowdown in profits. I really don’t know why. In this third-quarter alone, the country’s big six banks earned over $8 billion. It was thanks to those earnings, they decided to increase dividends across the board and I was a lucky recipient for 4 out of those 5 increases.
I recognize many Canadians are quick to loathe our banking system, for their service fees and various surcharges. The fact is, banks are involved in variety of businesses and only about 5% of their revenue stream is associated with banking fees. The majority of big-bank revenue is derived from, and you probably guessed this, lending activities. Banks extend loans to individuals and businesses to facilitate the purchase of homes and cars or new equipment and facilities respectively. Given our ultra-low interest rate environment over the years, the more Canadians have borrowed the more the banks have earned so to complain about this just realize you and I only need to look so far into the mirror to understand part of the issue. Excessive or sustainable borrowing activities aside, I believe successful banks, love ‘em or hate ‘em are good for our Canadian economy. Most Canadians shareholders either directly or indirectly though mutual funds, Exchange Traded Funds (ETFs) or pension plans. Our banks employ close to 300,000 Canadians and many charities and non-profit organizations receive tens of thousands of dollars per year in donations and sponsorship. They are healthy for the Canadian economy and equally healthy in my portfolio.
Factoring in recent bank dividend increases, I calculated we’re on pace to earn about $6,100 in dividend income this year. This surpasses my expectation of $6,000 I’ve reported on for a few months – you can check out updates from July and June here.
Our dividend income portfolio is now compromised of 25 Canadian companies (including a few banks) that have a history of paying consistent dividends. These companies are in our non-registered and tax-free accounts, the latter we will continue to leverage more over time to generate most of our income tax-free. Exchange Traded Funds are also in our broader portfolio, in other registered accounts, as are U.S. dividend paying stocks but I don’t include those values in these income updates. This is because my reports focus on how I’m building a tax-efficient and tax-free dividend income portfolio to earn $30,000 CDN from Canadian companies that will fund our retirement dreams.
When buying stocks directly, the quality of the company is a priority. If you have a long holding period, while short-term volatility for all companies will be experienced, the longevity of the quality company should prevail. This includes Canadian banks. This quality + time formula combined with diversification across many Canadian companies in my portfolio, should allow me to reach my dreams. I’ll keep you posted.
How is your portfolio coming along? How are you reaching for your retirement dreams?