This recent market turmoil has impacted some sectors more than others. Canadian financials have been hit very hard, and the broad market continues to price in a level of pain which has not been allocated to other sectors such as technology. Right now, Canadian financials remain on my watch list. In this article, I’m going to explain why I think most investors ought to take a similar approach to these equities.
Canadian financials are heavily weighted on the Toronto Stock Exchange (TSX), accounting for roughly one-quarter of the index. However, investors focused on Canada have largely shifted their search to Canadian technology options and other higher-growth plays in this market recovery. Banks do not have the leadership they once did in providing the majority of gains on the TSX, and I expect this trend to continue. This new wave of investing is best exemplified by the recent passing of Royal Bank of Canada (TSX:RY)(NYSE:RY), previously the most valuable company on the TSX in market capitalization terms, by Shopify Inc. (TSX:SHOP)(NYSE:SHOP), a company with approximately 4% of the revenue of Royal Bank.
As far as size, safety, and dividend income go, companies like Royal Bank deserve consideration as a core holding for long-term investors. I’d encourage placing Royal Bank in a taxable (non-registered) account for this reason. One will then be able to take advantage of the dividend tax credit for the dividend provided.
