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Is Bank of Montreal Really a Safe Dividend Bet?

Bank of Montreal (TSX:BMO)(NYSE:BMO) has been paying dividends since 1829!

That’s a long history of giving shareholders a piece of the profits, but new investors want to know if the company can continue to provide consistent payouts given the current headwinds facing Canada’s banks.

Let’s take a look at the situation to see if Bank of Montreal deserves a spot in your dividend portfolio.

Earnings

Bank of Montreal delivered Q1 2015 net income of $1 billion, which is down 6% compared to the same period in 2014. Adjusted earnings per share dropped 5% and adjusted return on equity (ROE) slipped to 12.3% compared to 14.5% a year earlier. Provisions for credit losses rose to $163 million compared to $99 million in Q1 2014.

The snapshot outlined above doesn’t look so good, but once we drill into the numbers, there are some bright spots.

Bank of Montreal splits its business into four segments.

Canadian personal and commercial banking delivered Q1 2015 net income of $502 million, a 4% year-over-year increase. In personal banking, loans increased by 3% and deposits rose by 8%. On the commercial side, deposits and loans both grew by 7% compared to Q1 2014. Overall, it was a decent quarter considering the challenging market conditions.

South of the border, Bank of Montreal did even better. The company’s U.S. operations delivered adjusted net income of $205 million, a 14% increase compared to last year, as a strong U.S. dollar and 10% year-over-year loan growth boosted results.

Wealth management is another segment Bank of Montreal relies on for revenue growth and the company has placed a strong emphasis on expanding this area of the business. Excluding acquisitions, assets under management (AUM) increased by 18% in Q1 2015, driven by the addition of new client assets, the strong U.S. dollar, and market appreciation.

So, where did all the losses come from?

The bank’s BMO Capital Markets group saw net income plunge by 20% to $221 million in Q1 compared to a year ago. Capital markets activities tend to be more volatile than retail operations and earnings in the segment can swing wildly from one quarter to the next.

Dividends

Bank of Montreal pays a dividend of $3.20 per share that yields about 4.25%. The company has increased the payout five times in the past three years.

Should you buy?

Bank of Montreal currently trades at 10.6 times forward earnings and 1.3 times book, which are attractive metrics compared to the five–year averages. The company offers good earnings diversity spread out across its four business units and the strong U.S. operation helps offset some of the risks facing the Canadian market.

The dividend is very safe and investors should be comfortable buying the stock and simply sitting on it for decades.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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