In today’s investing world, nothing seems to be more sacred than dividends. Whenever a company cuts its dividend, its share price plummets. So when companies need to raise money, a dividend cut falls to the bottom of every list when looking at potential sources of cash. And that will not change any time soon.
Outgoing TD Bank (TSX: TD)(NYSE: TD) CEO Ed Clark got a good lesson on just that when he changed the bank’s dividend policy. Just to be clear, he didn’t cut the dividend or even slow down future increases. Instead, from now on the dividend will be raised only once a year, down from twice a year. The move will give the bank more flexibility each year, but the change surprised analysts, and now Mr. Clark has had to defend the decision numerous times, most recently at TD’s annual meeting.
Many investors buy bank stocks just for the dividend. All that matters to them is how much the dividend yields and how much it grows. With that in mind, here is how the different banks stack up.
|Bank||Dividend Yield||5-Yr Dividend Growth|
|Bank of Nova Scotia||3.94%||5.49%|
|Bank of Montreal||4.11%||1.66%|
When looking at this table, one can understand why investors are so concerned about dividend growth at TD. The bank has delivered more of it than any other bank over the past five years. And as a result, investors are counting on that dividend to keep growing quickly in years ahead. This is partly why these investors are willing to accept a lower yield than at any of the other banks.
Compare that with banks like Bank of Montreal (TSX: BMO)(NYSE: BMO) and CIBC (TSX: CM)(NYSE: CM). The two banks have had the slowest dividend growth out of the big five, which is why investors are demanding a higher yield. Of course future dividend growth may differ dramatically from the past – but until it does, investors are still saying “show me.”
Foolish bottom line
You should never buy a bank just for the dividend; your total return will depend much more on the underlying fundamentals of the business. But there are a lot of investors who look at the dividend first, which is why Mr. Clark got so much blowback for the changed policy. Fortunately for the bank, even these investors will eventually forget about the changed policy if TD continues to perform as it has in the past.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.