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Income Investors: Should You Buy CIBC (TSX:CM) Stock for its Dividend Growth and 5% Yield?

Retirees and other income investors thought rising interest rates were finally going to make bonds and GICs attractive again, but the plunge in bond yields in recent months has wiped out those hopes.

With rate hikes now on hold and bond prices soaring, the banks have gotten stingy. A five-year GIC now offers an unattractive 2.5% yield compared to the 3.5% that was briefly available in late 2018. The higher rates still weren’t great, but they were at least getting closer to something people could use to generate a bit of reasonable income.

As a result, dividend stocks are back in vogue. While the share prices of many of the popular names have recovered, investors can still pick up some attractively priced companies offering above-average yields.

Let’s take a look at CIBC (TSX:CM)(NYSE:CM) to see if it is an interesting pick for your income portfolio today.

Unloved

CIBC is the smallest of the Big Five Canadian banks and has a history of making significant blunders. During the Great Recession, CIBC had to write down roughly $10 billion in bad bets on subprime mortgages in the United States. A few years earlier, it forked over $3 billion for penalties connected to claims it had a hand in helping Enron hide losses.

After the financial crisis, management focused on the Canadian market with a big bet on the residential housing boom. That turned out to be a very profitable strategy, but analysts started to get concerned that CIBC was becoming too exposed to the domestic market.

Turnaround

As a means to diversify the revenue stream, the company spent US$5 billion in 2017 to acquire Chicago-based PrivateBancorp. The deal wasn’t cheap, but it gave CIBC an important platform in the U.S. to expand its presence in the sector and added a nice hedge against potential trouble in the Canadian market.

Oversold

CIBC likely carries more risk than its larger peers, but the discount the market is allocating to the stock appears overdone. CIBC trades at roughly 9.6 times trailing earnings, which isn’t far off the multiple you would expect to see when a financial crisis is brewing.

That doesn’t appear to be the case. Employment remains healthy in Canada and the move by the BoC to halt rate hikes should reduce near-term housing market risks. CIBC is well capitalized and the mortgage portfolio, while large, is capable of rising out a downturn in the housing market.

Dividends

CIBC remains very profitable and continues to raise the dividend. The current payout provides a yield of 5.2%.

Should you buy?

The stock trades at $108 per share compared to $124 last September. A meltdown in the Canadian housing sector would hit CIBC harder than its peers, so some discount is likely warranted, but the company is on sounder ground with the addition of the U.S. business and investors might not be giving management the credit that is deserved for the work that has been done to remove risk.

If you have a buy-and-hold strategy, CIBC should be a solid pick today for an income portfolio.

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

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