Price risk in banks: Dividends safe?

Canadian investors are increasingly loving their dividends.

We have been somewhat fortunate in Canada that our banks have bounced back relative to European and U.S. banks (94% of peak 2007 price vs. 39% in the U.S. and 23% in Europe).

Last week's $2-billion US hedging/speculating loss at JP Morgan is a case in point that the risk in the sector is higher than many think.

Most investors cannot handle the price volatility in their portfolios despite their need for dividends -- it is a psychological problem for people in general and aging investors in particular.

Sadly, most Canadians are significantly underfunded for their retirement years and increasing volatility in the global equity market combined with negative real yields in bonds do not make for a comfortable (65% bond, 35% equity) retirement asset allocation.

While we do not see a particular threat to the dividend in Canadian banks at this point, we do see a notable price risk.

The problem is not with Canadian bank earnings in particular, it is with systemic risks of the global banking system.

Our charts today [Please see video] show some perspective over the past 5 years. Unfortunately, the inevitable break-up of the euro and additional downgrades to U.S. debt in the coming years will likely have a destabilizing effect on the markets for years too come.

Investors need to be active to manage portfolio risks: If you are the type of investor that loves your dividends, but can't handle the volatility, it might be time to raise a bit of cash, write a call to help increase your yield while you wait, or rotate into the ZWB (BMO covered call bank ETF) to help cushion some of the potential price risk.

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