Dividend Investors: A Top Reason to Buy Canadian Bank Stocks Now

Here is why bank stocks such as Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) should be on the buying lists of dividend investors.

| More on:

It seems there’s little to worry about with Canadian banking stocks this year. Their stocks should be in demand at a time when the North American economy is going strong and interest rates are rising.

But the price action so far this year suggests that investors aren’t very excited about Canadian financial stocks. Canada’s top five banking stocks haven’t done much for their investors. In fact, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) are down between 4% and 5% in the past one month. The losses are much steeper if you compare current prices with their 52-week highs.

The increasing volatility in markets has a role to play in this bearish spell, as investors re-price the risk and move their funds to safe-haven assets, such as government bonds.

But I don’t have any doubts that it’ll be Canadian banks that will lead the market recovery when investors are ready to put their money back to work. The latest sign of this upbeat outlook came from CIBC’s first-quarter earnings, which beat analysts’ expectations.

CIBC reported $1.43 billion, or $3.18 a share, profit for the quarter, excluding certain items. Analysts polled by Bloomberg were expecting a profit of $2.83 per share. Its expansion in the U.S. and rising interest rates were the two key factors that boosted earnings, helping the bank to hike its quarterly dividends by $0.03 to $1.33 per share.

“In the quarter, CIBC delivered strong results across all four strategic business units,” said Victor Dodig, the bank’s chief executive officer, in a statement.

The better-than-expected earnings should allay fears of some investors who think that CIBC is the most exposed bank to the nation’s slowing housing market; its portfolio of uninsured mortgages is the largest among Canadian lenders.

But the first-quarter data show that CIBC’s credit losses are well under control, and there is no risk on the horizon. The lender said it set aside less money to cover soured loans, with provisions for credit losses falling 28% to $153 million compared with a year ago. The bank credited the improvement to better economic conditions and lower bankruptcies in its credit card and personal lending portfolios.

Why should investors buy banks?

Investors who are looking to generate steady dividend income should consider Canadian banking stocks to take advantage of the temporary weakness.

These financial services companies have solid balance sheets and hefty cash flows to provide stability and growth to income portfolios. Canadian banks, on average, distribute between 40% and 50% of their net income in dividends and grow them regularly.

At the time of writing, CIBC and Bank of Nova Scotia, with their annual dividend yields above 4%, offer the best returns among the top five banks. History tells us that the laggards catch up quickly to the normal trend line, and any weakness in their stock prices is a buying opportunity.

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 Haris Anwar has no position in the companies mentioned.

More on Dividend Stocks

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use Your TFSA to Double Your TFSA Contribution

If you're looking to double up that TFSA contribution, there is one dividend stock I would certainly look to in…

Read more »

woman looks at iPhone
Dividend Stocks

Retirees: Is TELUS Stock a Risky Buy?

TELUS stock has long been a strong dividend provider, but what should investors consider now after recent earnings?

Read more »

Concept of multiple streams of income
Dividend Stocks

Is goeasy Stock Still Worth Buying for Growth Potential?

goeasy offers a powerful combination of growth and dividend-based return potential, but it might be less promising for growth alone.

Read more »

A person looks at data on a screen
Dividend Stocks

How to Use Your TFSA to Earn $300 in Monthly Tax-Free Passive Income

If you want monthly passive income, look for a dividend stock that's going to have one solid long-term outlook like…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Passive Income Seekers: Invest $10,000 for $38 in Monthly Income

Want to get more monthly passive income? REITs are providing great value and attractive monthly distributions today.

Read more »

Forklift in a warehouse
Dividend Stocks

Invest $9,000 in This Dividend Stock for $41.88 in Monthly Passive Income

This dividend stock has it all – a strong yield, a stable outlook, and the perfect way to create a…

Read more »

An investor uses a tablet
Dividend Stocks

3 No-Brainer TSX Stocks to Buy With $300

These TSX stocks provide everything investors need: long-term stability and passive income to boot.

Read more »

analyze data
Dividend Stocks

End-of-Year Retirement Planning: 3 Buy-and-Hold Stocks for Canadian Investors

Choosing the right stocks for the retirement portfolio differs from investor to investor. However, there are some top stocks that…

Read more »