Canadian Banks Generating Huge Profits: CIBC and National Bank Lead the Way.

Earnings season for the Canadian banks were off to a great start on Thursday when CIBC (TSE:CM) reported a $799 million profit. This was more than what industry experts were expecting and could bode very well for investors in Canada's other major banks as well.

Last year, the bank reported earnings of $652 million during the same three month period. This growth is an indication of an improved lending environment in Canada, as well as an improved environment for investment fund managers, of which CIBC Mutual Funds is a large player. When stock markets increase in value, the amount of money that CIBC charges its clients to manage money (usually around 2-2.5%) goes up as well. 

CIBC said it would maintain an 87 cent per share dividend, but investors were hoping that they would boost it, giving the other banks motivation to do the same. Currently CIBC is only paying out about 45 percent of its earnings to shareholders, which is a very reasonable number and a number that could be increased in the future. For the intelligent investor, the ability for CIBC to raise its dividend in the future is a sign of financial health and a good catalyst for a rise in the share price in the future. 

In addition, the company has more than enough capital on hand to make acquisitions or initiate share buybacks. Share buybacks are great for shareholders as they increase earnings per share by reducing the number of shares, which increases your share of the business pie.  

National Bank (TSE: NA) also reported a record profit of $312 million. Last year, quarterly profits came in at $215 million. This massive increase will surely bode well for shareholders when the company reviews its dividends and perhaps decides to increase the amount of money that they want to pay out to shareholders. 

Both National Bank and CIBC have provided an excellent window into the health of the Canadian financial landscape. As a Canadian investor, it is important to ensure that one of Canada's financial conglomerates, whether it be CIBC, National Bank, Royal Bank (TSE:RY), Scotiabank (TSE:BNS), TD (TSE:TD), or the Bank of Montreal (TSE:BMO), make up a portion of your investment portfolio. The balance sheets are healthy, business is booming, and dividend increases are sure to start coming down the road. Just be careful not to get too greedy and overpay for them on a day when other investors have bid up the share prices. Wait for a down day and gradually buy your way in.

Happy Investing : )

For more information on this topic check out:

http://www.vancouversun.com/news/CIBC+earnings+ahead+expectations+share/4344970/story.html

http://www.winnipegfreepress.com/business/cibc-q1-exceeds-expectations-116904108.html

Are You Diversified? How Can You Tell?

One of the most common questions investors have is whether or not they are diversified. For most, the answer is no. But how can you tell if you are diversified so that you can avoid your portfolio imploding during the next stock market bust?

To truly be diversified an investor must own a broad range of securities and businesses that generate income in many different ways, and in many different places.

• Firstly, your businesses or investments must be located in a number of different places. This means that your portfolio should be generating income across the country, and around the world. As Canadians, most of our investments generate their income in Canada, but it is important for us to remember that this is a VERY small part of the world economy. We must also include businesses from the United States, Europe, and the developing world. Initially, the best way to do this might be to own a business like Coca-Cola (NYSE: KO) or Proctor and Gamble (NYSE: PG), which generate profits all around the world.

• Secondly, the intelligent investor should ensure that they own different asset classes of securities. This means that they should own bonds, real estate, and stocks... in addition to perhaps gold, silver, etc. in a larger portfolio. One should not own simply businesses listed on the stock exchange and not any bonds or something that will provide a more steady stream of income. But be careful, DO NOT own too much real estate, this is a very common mistake in the current investment climate. 

• Lastly, the intelligent investor must own a number of businesses that generate their income in different areas of the economy. For instance, Scotiabank (TSE: BNS) generates its income via banking, Suncor (TSE: SU) generates its income in the oil and gas industry, and Metro (TSE: MRU.A) generates its income in the grocery retail businesses. Together, these three businesses would provide the investor with a broader and more steady stream of income than if they owned just one. When one part of the economy is declining, another might very well be increasing.

Disclosure: The author of this article has an ownership interest in Metro and Suncor.

Be sure to e-mail me with any of your questions : )

Avoid TFSA Penalties and Shelter Your Largest Gains From Taxes.

TFSA's, or tax-free savings accounts, are a great option for Canadian investors. With the ability to contribute $5000 every calendar year, they are fantastic ways for young Canadians to begin saving for retirement, or large purchases that they may make in the future. It is important, however, to use them wisely. 

Remember not to violate the rules governing the accounts that have been placed there by the government. 72,000 Canadians have already been hit this year with tax penalties for violating one basic rule... you can NOT put money in, take it out, and then put it in again in the same year. Many people, because of the titles of the accounts, are using them for plain vanilla savings, but that is not what they are designed for. If money is going in, you should leave it there for the year... unless you are sure you are not going to put it back in again.

Basically, TFSA's allow account holders to invest up to $5,000 a year in the accounts, and the gains therein can grow tax-free. They have been very popular, with more than five million opened since 2009. But the average penalty for those who "over-contributed" to the accounts by taking money out and then putting it back in again was $179.10. The Federal Government's Revenue Minister Keith Ashfield said in a statement last June that "We understand that it may take time for some Canadians to learn about the program and for some financial institutions to properly inform their clients about this product. ... We have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred." And thus the government has granted relief to most of those who complained about the penalty.

To be sure, the rules are not being explained to most Canadians when they open the accounts. The information is located in the fine print of most of the account opening documents. For Scotiabank it states; "The amount you withdraw can be put back in your TFSA starting the following year without impacting your contribution room." It also notes that a one per cent per month over-contribution penalty will be levied by the CRA to any excess contributions, similar to the rules for an RRSP.


In addition, the major banks are advertising the TFSA's as savings accounts, when in actuality they are more like Tax-Free Investment Accounts. Money should not be taken in and out like with a conventional savings account. Rather, since stocks and other investments may be held within them, the TFSA's should be used to generate longer-term income through the use of dividend paying stocks or mutual funds. A couple high-quality long-term stocks, such as Imperial Oil (TSE:IMO) and Scotiabank(TSE:BNS), would be great names for inclusion in a Canadian's TFSA. The intelligent investor will put something in their TFSA that they might otherwise have had to actually pay tax on... and since most banks do not pay you enough interest on your GIC's or cash savings, you will often not need to shelter that income from taxation. You want to shelter your largest potential gains from taxation, and most often those gains will arise from high-quality, dividend paying stocks. So take a look at your TFSA and ensure that it has the right investments inside it because, more often than not, the banks have been not giving the best advice on these accounts.