Potash Corp./Saskatchewan Inc. vs. Bank of Montreal: Which Is the Best Dividend Investment?

Potash Corp./Saskatchewan Inc. (TSX: POT)(NYSE: POT) and Bank of Montreal (TSX: BMO)(NYSE: BMO) both offer dividend yields above 4%. Investors looking for safe yield after the meltdown in the oil sector might be wondering if these two stocks are good bets.

Let’s take a look at both companies to see if one is a better pick for your dividend portfolio.

Potash Corp.

This is an exciting time for investors in Potash Corp. The world’s population continues to grow and the middle class in many countries is expanding rapidly. As their wealth increases, people tend to eat more beef and poultry. Chickens and cows have to eat just like people do, and that means even more demand for crops and the nutrients needed to help them grow.

Combine these factors with the depletion in global farmland and you get a great recipe for long-term expansion in potash demand.

Potash Corp. is in the final stage of a multi-year capital expansion project just as demand and wholesale prices for potash are moving higher. In fact, global potash sales are expected to hit record levels in 2014 and continue to grow next year. Prices are also being supported by a large cut in production capacity at a mine operated by Uralkali, the world’s largest potash producer.

The completion of Potash’s expansion project means more free cash should be available for distributions and share buybacks. At the same time, stronger prices and increased production should drive revenue and margins higher in the coming years.

Potash pays a dividend of US$1.40 per share that yields 4%. As free cash flow increases, investors should see generous dividend hikes moving forward.

Bank of Montreal

Canada’s oldest bank has increased its dividend five times in the past three years and has given shareholders a piece of the profits every year for almost two centuries.

The current distribution is $3.20 per share and provides a 4% yield.

Bank of Montreal is betting big on the U.S. recovery. In 2011, it bought Wisconsin-based Marshall and Ilsley Corp. for $4.1 billion to expand its presence in the manufacturing-heavy U.S. midwest. This strategy is helping the company diversify earnings amid concerns about a Canadian housing bubble. The company is also aggressively expanding its global wealth management operations.

In its recent earnings statement, Bank of Montreal reported year-over-year revenue growth of 8% compared to the same period in 2013. Earnings per share were up slightly.

Which should you buy?

Both companies are solid long-term investments, but Potash Corp. is probably the better bet right now for investors looking for strong dividend growth. The company should see healthy increases in free cash flow in the next two years and that could translate into big dividend hikes or share buybacks.

Bank of Montreal is facing some headwinds going into 2015. The stock has had a great run, but competition for loans in the U.S. is putting pressure on margins, and Canadian retail customers are getting to the point where they are taking on way too much debt.

Your instant 5-stock dividend portfolio for 2015

Potash and Bank of Montreal are good picks to start a dividend-growth portfolio but you might want to add one or two more stocks to diversify the holdings.

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Fool contributor Andrew Walker owns shares of Potash Corp. The Motley Fool owns shares of Potash Corp.

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