Turning Off The Taps A Bit

Over the past couple of years I have had DRIPs turned on for a few positions. I haved DRIPped shares and units of Boston Pizza Royalties Income Fund (BPF.UN), Cominar REIT (CUF.UN), Dream Office REIT (D.UN), Killam Properties REIT (KMP.UN), Enbridge (ENB.TO) and Bank of Nova Scotia (BNS.TO). Some of these positions are through the brokerage while others are directly with the transfer agent. The latter is the basically the "old" way of buying stocks where you get actual stock certificate. The downside of the "old" way of purchase stocks is that you do not have control over the purchase price or sell price as you just send in a check and the shares or units are purchased on a certain date. Also the purchase prices could be averages of the last few days or some other criteria that would be often spelled out in the documentation.

Recently, I have had DRIPs turned on the Enerplus Corporation (ERF.TO), D.UN, CUF.UN, BNS.TO, and ENB.TO. The DRIPs for BNS.TO and ENB.TO are directly with the transfer agent and these positions are in the investment tab spreadsheet and have partial shares. Some brokerages off partial shares, but they are few and far between.

I have turned off my DRIPs for D.UN, CUF.UN, and ERF.TO. The dividend payout for ERF.TO is no where close to being able to purchase 1 whole. D.UN was dripped in both my TFSA and margin accounts. I have turned off the DRIPs due to my current financial situation. I would prefer to keep the DRIPs on for both D.UN and CUF.UN as these positions are trading above my average cost basis per share.

I am keeping the DRIPs on for ENB and BNS with the transfer agents. For disclosure, I also have positions in ENB in my TFSA and BNS in my margin account.

The benefits of DRIPs, is that it is a way to acquire more assets for doing basically nothing. Also, a lot of DRIPs have discounts on the shares purchased with re-invested dividends. Does this apply to DRIPs by brokerages? Some brokerages pass the discounts along while others do not. My brokerage, Questrade, does not pass the discount along.

There is also some posts on DRIPs in my DRIP tab above.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

What Happened to Big Banks After The Rate Hike?

         I recently wrote about the recent rate hike by the Bank of Canada.  On July 12th, the Bank of Canada announced that they are increasing the interest rate from 0.75% to 1.00%.

        Shortly afterword the rate hike, the big banks raised their rates.  Royal Bank of Canada even raised the rate prior to the rate hike on their 1,3, and 5 year terms by 0.20%.

        The chart below compares how the big banks on the Toronto Stock Exchange have done this week.  The announcement was 10am Eastern Standard Time on Wednesday.  As we can see from the chart, the Canadian Imperial Bank of Commerce was the leader over the last week.

Click to Enlarge

         As you can see, the investors and trades liked the rate increase.  Royal Bank (RY.TO) went up the morning of the rate increase but dropped  back down.  As state above, RY raised their 1,3, and 5 year term rates by 0.20% prior to the rate hike, and the rate hike was likely factored in. When people go get a mortgage or renew their fixed rate mortgage will have higher payments.

     After the rate hike, Royal Bank was the first to raised there prime rate from 2.70% to 2.95%.  The other 4 big banks followed suit.  The increase in the prime rate affects loans, variable rate mortgages and line of credit. Anybody with variable rate loans, lines of credits, and variable rate mortgages will see an immediate increase in their payments due to higher interest rates.

      Why is the rate hike good for the banks?  The rate hike means more profits for the big 5 banks. The big 5 banks do not immediately increase the rates on their savings accounts, therefore the spread of interest paid to savers and the interest the banks received from payments of individuals or companies is larger.

       The banks offer very low interest rates on their respective savings accounts.  This makes savers to look elsewhere for yield, and they usually turn to the stock market for dividends and interest. This is why the stock market is trading near all time highs as their is more buyers than sellers for majority of blue chip stocks.

       Currently I own shares in 4 of the big 5 banks. I do not own RY.TO as of this date.  The big 5 banks in Canada are known around the world to be some of the best run banks in the  world.

      How do you like the rate hike by the Bank of Canada?

Disclosure: Long TD.TO, BNS.TO, CM.TO, BMO.TO

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Bank of Canada Announcement

         I recently wrote on the possible rate increase by the Bank of Canada.  This made the markets relatively quiet.  Although investors and analysts were factoring in a rate increase, there is always the possibility of a rate remaining unchanged.  Some analysts and people in the higher ups on the corporate ladder in the big 5 banks said it is not a good time to raise rates.  This is largely due to the economy in Alberta being in the gutter and the housing prices in Vancouver and Toronto.

        Although housing remain expensive in Fort McMurray and Calgary, the economies of these 2 Alberta cities is struggling.  There has hint of optimism in the air in Calgary in recent months.  The Alberta government based their budget on the price of a barrel of crude oil averaging $55 per barrel. Well, three and a half months into Alberta's fiscal year, an oil is currently trading around $46.00. The price of oil has not come close to $55 per barrel.  The price of oil actually dipped below $43.00 per barrel a few months ago.  Some analysts are predicting oil to go to $80 dollars a barrel while others believe oil will trade between $45 and $55 per barrel for the foreseeable future.

       At 10am eastern standard time on July 12, the Bank of Canada governor raised the interest rate from 0.50% to 0.75%, which is a 25 basis point increase.  This is on the heels of the Fed raising the rate in the United States recently.  Did the governor of the Bank of Canada raise the rate because the FED raised their rate?  Our economies are different.  The economic engine of Canada currently is Alberta.  With Alberta having a carbon tax along with the low oil prices, this is making companies hesitant to drill for oil.

      The increase by the Bank of Canada has lead, to no surprise, the big banks increasing their rates. So borrowing money will be more expensive for mortgages and loans.  I believe this could affect interest rates on line of credits and credit cards in the very near future.

Conclusion

     I believe the Bank of Canada should not of raise the rate due to the state of our economy.  Although Canada is doing well as a whole, there are provinces struggling with their economies and finances.  We hear every month recently that jobs have been created.  These jobs are often part time jobs though.  People often have to work 2 or 3 jobs to get by nowadays.  Also with part time jobs, their are no benefits which adds a lot of expenses to people who have lots of medical expenses.

    Vancouver and Toronto have home prices that are through the roof.  On the other extreme, we have houses that are super cheap as their are not buyers available.  For Vancouver and Toronto, people are paying over a million dollars on average for a home.  The mortgages will come with high payments.  With the rate increase, when it comes to a new mortgage or renewables, the payments on their mortgages will be higher.  This 25 basis point increase is the first time, the Bank of Canada has raised rates in over 7 years.

   North America, as a whole, as not seen a recession since the financial crisis of 2008-2009.  History has shown that a major recession occurs every 8-10 years.  When recessions do occur, the interest rate by the Bank of Canada and the FED usually decreases by a few percentage points.  See, the FED and Bank of Canada raises the interest rate to slow the economy.  Likewise, the effect of decreasing the interest rate, is to in courage people  to spend money as they have more money available due to lower payments.

   In the past several years, we have seen people buy homes for the first time due to the low rates.  These people might be OK now, but when time comes to renew their mortgages, their payments will be higher.  The term of mortgages are 1, 3, or 5 years.  See, a mortgage could have an amortization of 25 years but a mortgage has to be renewed towards the end of the term.  The United States, unlike Canada, can have an amortization of say 30 years and have a 30 year term mortgage. This is advantageous to US residents who take out mortgages when interest rates are low as they are right now.

   On the flip side, there is no major announcements of the banks raising the interest rate on savings account. The bank that I have my high interest savings account, if you can call it that, has not increased their rates as the time of this writing.  However, prior the interest rate hike by the Bank of Canada, Tangerine is paying an interest rate of 2.97% on new deposits up to a maximum $500000 for a few months.  Currently , the interest rate is 0.80% for Tangerine high interest savings accounts and the Tax Free Savings accounts.

   Some analysts and investors believe we will see another rate increase by the Bank of Canada this year.  This possible future rate increase is believed, by many, is going to happen in December 2017.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.