Boost Your Income With Canadian Banks That Are Priced at a Discount

Which of the Big Five Canadian banks should you buy? Which has the best value and income-growth potential today? Is it Royal Bank of Canada (TSX:RY)(NYSE:RY), Toronto-Dominion Bank (TSX:TD)(NYSE:TD), or perhaps Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM)?

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The Big Five Canadian banks have paid dividends for over a century! They are great investments for any long-term portfolio. If you’re looking for current income, they’re a good fit, yielding 4-4.5%. If you’re looking for income growth that beats inflation to maintain your purchasing power, some of the banks have dividend growth of 8-12% a year.

Didn’t Warren Buffett say to buy great businesses at fair prices? Well, what’s more to like about the banks is that some are priced at discounts of over 13% today.

Royal Bank of Canada (TSX:RY)(NYSE:RY) costs $73.6 per share and yields 4.3%. For the past three years, Royal Bank has increased its dividend at a compound annual growth rate (CAGR) of 10.9%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $136 by now, a 36% increase in income.

With a payout ratio of 48%, Royal Bank’s projected annual payout of $3.16 per share is safe. The bank currently trades at a price-to-earnings ratio (P/E) of 11.2, and it normally trades at a P/E of 12.8. This means the shares trade at a fair price of $85 and are currently discounted by 13.4%.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) costs $52.9 per share and yields 3.9%. For the past three years, Toronto-Dominion Bank has increased its dividend at a CAGR of 12.1%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $140 by now, a 40% increase in income.

With a payout ratio of 49%, Toronto-Dominion Bank’s projected annual payout of $2.04 per share is safe. The bank currently trades at a P/E of 11.4, and it normally trades at a P/E of 12.6. This means the shares trade at a fair price of $58 and are currently discounted by 8.8%.

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) costs $60.4 per share and yields 4.6%. For the past three years, Bank of Nova Scotia has increased its dividend at a CAGR of 7.7%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $125 by now, a 25% increase in income.

With a payout ratio of 53%, Bank of Nova Scotia’s projected annual payout of $2.80 per share is safe. The bank currently trades at a P/E of 10.5, and it normally trades at a P/E of 12.8. This means the shares trade at a fair price of $72.8 and are currently discounted by 17%.

Bank of Montreal (TSX:BMO)(NYSE:BMO) costs $75.4 per share and yields 4.4%. For the past three years, Bank of Montreal has increased its dividend at a CAGR of 3.2%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $110 by now, a 10% increase in income.

With a payout ratio of 52%, Bank of Montreal’s projected annual payout of $3.28 per share is safe. The bank currently trades at a P/E of 11, and it normally trades at a P/E of 11.9. This means the shares trade at a fair price of $81.7 and are currently discounted by 7.7%.

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) costs $98.9 per share and yields 4.5%. For the past three years, Canadian Imperial Bank of Commerce has increased its dividend at a CAGR of 4.2%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $113 by now, a 13% increase in income.

With a payout ratio of 50%, Canadian Imperial Bank of Commerce’s projected annual payout of $4.48 per share is safe. The bank currently trades at a P/E of 10.5, and it normally trades at a P/E of 11.4. This means the shares trade at a fair price of $108.1, and are currently discounted by 8.5%.

In Conclusion

It’s true the Big Five banks froze their dividends during the financial crisis. However, all of the banks have grown dividends for four years in a row now, except for Bank of Montreal, which has increased it for only three years in a row.

Royal Bank of Canada and Bank of Nova Scotia are priced at a discount of over 13%, or have a margin of safety of over 13% based on their normal historical multiples. On the other hand, in the past three years Royal Bank and Toronto-Dominion Bank have provided the highest income growth. Because of the above reasons, these three banks are the best choices of the five for long-term income and growth.

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 Kay Ng owns shares of Royal Bank of Canada (USA), The Bank of Nova Scotia (USA), and The Toronto-Dominion Bank (USA).

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