My bank’s checking account has a $3.95 monthly fee. However this fee is dropped if I have at least $1,500 in that account for the entire month. Typical right? Just about every bank does this. Keep a minimum balance in your account, and the account fee is waived! I used to maintain the minimum balance to avoid paying fees. But I wasn’t too happy about it because I was essentially lending the bank my money, interest free.
But recently I have removed the minimum balance out of my account and started to actually pay $3.95 every month. But why would I choose to pay more fees when I don’t have to? Answer: *Opportunity Cost (^_^)
It’s true that by keeping a minimum balance of $1,500, I save $47.40 a year
on checking account fees. But if I can make more than $47.40 a year by investing $1,500 then I would be better off investing that money instead of keeping it tied up in the bank right? So that’s why I transferred the money from my checking account into my brokerage account, and used all that money to buy my bank’s own common shares.
In other words, I purchased $1,500 worth of TD Bank stocks. That’s because the stock’s dividend was more than enough to cover my checking account fees. Even today, according to google finance,
TD Bank currently has a dividend yield of 3.46%
. This means if you invest $1,500 into TD shares today, TD will pay you $51.90 every year in dividends. If you live in BC and make between $43K and $74K of income per year like me, then you will only have to pay a *few dollars of tax
on that amount and pocket $48.38
. Not too shabby (^o^)
To review, I am now paying the bank $47.40 in fees every year. Meanwhile the bank pays me $48.38 (after tax) for being a shareholder. Basically this means I get to use the bank’s chequing account service for free, AND make a tiny profit to boot. But it gets better! TD has grown it’s dividends 11 times in the last 12 years （ ﾟдﾟ）So this year I may receive $48.38 like we’ve calculated, but next year, I wouldn’t be surprised if TD pays me $50 or more because those dividends keep going up. But it gets even better! The *payout ratio for TD is under 50%! This strategy also protects me from higher banking fees in the future because once I became a shareholder, every dollar of profit the bank makes from charging their customers higher fees will only add value to my stocks.
Of course not everyone banks with TD. But this strategy is transferable. Here’s some basic information on a few other banks below.
BMO Practical Plan Chq Acct: Fee = $4.00/month. Waived with $1,000. BMO’s stock dividend yields 4.80%
CIBC Everday Chq Acct: Fee = $3.90/month. Waived with $1,000. CIBC yields 4.69%
Scotiabank Powerchequing Acct: Fee = $3.95/month. Waived with $1,000. Bank of Nova Scotia yields 3.96%
But I can see why this may not be a good idea for some people. This strategy does come with risks after all. You risk the banks cutting their dividends in the future, even though they all have a solid history of growing them. You also risk losing some of your initial investment if their share prices drop and never recover, even though banks are the oldest and largest companies in Canada and the backbone to our whole economy. For short term investors and those who want to play it safe, keep your balance in the bank to save yourself some money. But if you want to live on the edge like me, then don’t let your bank hold your money to only benefit their own interests. Buy a piece of your bank instead and profit with them, and by the time you retire maybe you’ll be a little wealthier than if you hadn’t. (^_~)
*Opportunity Cost – Losing the opportunity to profit from a choice, because another choice was taken. Go ask an economist for a better explanation (>_<)
*few dollars of tax – The dividend tax credit makes dividend income very tax friendly. Depending on your location and other income, you may not have to pay any taxes on dividends at all.
*payout ratio – To be explained in a future post.