ZEB and Gold

by JDH on May 30, 2020

As mentioned last week, I have taken a position in ZEB.TO – BMO Equal Weight Banks Index ETF, an ETF that has an equal weight of the six largest Canadian bank stocks.

You would think this is a horrible idea, given that the banks this past week reported much higher loan loss provisions, and therefore much lower earnings.  We all assume that loan losses will continue to increase, so it would be logical to assume that bank stocks will continue to decline.

That may be true, but here’s the kicker: at current prices, ZEB is paying approximately a 5% dividend, and given that the banks distribute approximately 50% of their earnings in dividends, it is unlikely that the dividend will drop substantially.  More specifically, even with declining earnings, the banks will keep their dividends at current levels even if they need to distribute 90% of their earnings as dividends, so I don’t expect dividend levels to drop.

If that’s true, and if you plan to hold ZEB for the next two years, the daily stock price is irrelevant.  Buy it, hold it for two years, and as long as the share price is around where you bought it in two years you’ve earned 5% a year, at moderate risk.

At the bottom of the crash ZEB dropped to $18, but quickly recovered, and has traded in the $21 to $24 range since, so a purchase between $21 and $23 is a good bet.

We live in a world of zero interest rates.


If you want to put your cash in a “savings” type vehicle, products offered by Manulife and the big banks are currently paying 0.15%, which is essentially zero.  You can earn more if you lock it in for a year or longer, but if you want cash, you can’t earn anything.  ZEB becomes a good alternative.  It becomes your savings account, and provided you are willing to let it sit, you likely won’t lose.

In fact, if ZEB recovers to $29, where it traded in February, in addition to your 5% yield you could earn a nice capital gain.  It’s a moderate risk win-win.


As for gold, it’s stuck in a trading range between $1,675 and $1,775, and given that it is now the summer, it may be range-bound for a few months.

I have trimmed my gold holdings, and I’m holding cash, and I will wait to see what happens next.

That’s the update; more next week.