When you’re a dividend investor, it’s a common mistake to just blindly buy the highest yield you can find in the market. This is a mistake, as finding a high yielder could result in dividend cuts if the business fundamentals are not solid.
If you’re a smart dividend investor, you should look at historical dividend payout over the past 10 years or more. When you do this you should be asking yourself the following questions: Was the dividend cut? Has the dividend grown by a significant amount?
In the case of Bank of Montreal (TSX:BMO)(NYSE:BMO), we have a solid dividend that has been paid out to investors since 1829. That’s a long time! So there’s no question that the stock is a safe place to store your hard-earned savings. The bank has been through some horrible market sell-offs and recessions, but it still managed to get that dividend payout to investors in full.
The company also raises its dividend frequently, and I believe Bank of Montreal offers one of the safest dividends on the TSX. I’ll tell you why.
U.S. exposure means more stability for Bank of Montreal
The Canadian economy is very sensitive to fluctuations in commodity prices, as we’ve seen over the past few years with the price of oil plummeting to scary lows. So for a great dividend pick, a Canadian bank needs to expand beyond its borders for stability. The U.S. market is the perfect hedge against the decreasing loonie and a struggling Canadian economy.
Bank of Montreal runs a diversified business with excellent managers who are risk adverse. There are over 600 branches in America, which means that a big chunk of its profits are in U.S. dollars–that’s a terrific hedge against the loonie, which seems to be declining even though the price of oil has enjoyed a significant rally back to the $50 levels.
If you’re worried about the loonie going lower from here, you can pick up shares in Canadian businesses that have a significant portion of operations in the U.S. That way you can be properly hedged and not have to worry about whether to loonie goes up or down because you’ll benefit either way.
Right now the loonie looks like it could go even lower from here, as oil prices can no longer help the loonie gain value over the greenback. Going forward, as the Federal Reserve starts hiking U.S. interest rates, we can expect the loonie to drop in value even further to potentially below the $0.70 range.
Bank of Montreal is striving to increase its U.S. exposure even further; it acquired the finance division of General Electric Company earlier this year. This is a fantastic move that will make Bank of Montreal stronger in times of Canadian market turmoil; it will outperform its peers that have a more domestic allocation.
Bank of Montreal currently trades at a cheap 12.56 P/E with a 4.1% dividend yield. You can be certain that the dividend will be paid out in the harshest of economic environments–including a Trump presidential victory. If you’re a dividend investor, then you can do no wrong by picking up shares of Bank of Montreal at these levels.
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Fool contributor Joey Frenette has no position in any stocks mentioned. The Motley Fool owns shares of General Electric.