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TFSA Investors: 2 Dividend Stocks Offering Capital Gains

The Toronto Stock Exchange favoured investors in the banking sector this year with steady capital gains and above-average dividend yields. While dividend growth often indicates falling share prices, banking stocks prove to be an exception to the rule. Canadian banks, specifically, have a history of reliable dividend yields paired with share price growth.

In fact, in the past year, four out of the six top TSX bank stocks jumped 13% in market price while steadily increasing dividends. Bank of Montreal (TSX:BMO)(NYSE:BMO) and Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) stand out for active capital export strategies to boost current market valuations. TFSA investors should watch CIBC in particular, as it has recently made investments in technology M&A consulting.

Bank of Montreal

Bank of Montreal gave investors capital gains of 12.71% along with a dividend yield of 4.26% for an effective return of 16.8%. BMO boasts a reputation as the longest-running dividend-paying company in Canada. The bank has consistently paid shareholders 40-50% of its earnings in the form of dividends since the early 1800s.

Since 2010, BMO has expanded personal and small business operations in the United States, increasing adjusted net income from this market to 28% from 4%. Significant U.S. regions for the bank’s personal and commercial banking operations include Midwestern U.S. states, Arizona, and Florida. These U.S. states all share standard features: low operating costs and high profit margins.

Clearly, BMO’s geographical footprint embodies a conservative strategy in an industry attracted to risk. TFSA investors can expect liquid, tax-free returns from BMO, as the company continues its focus on steady, dependable growth.

Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce returned fewer capital gains to shareholders than the other top banks in the past year but compensated investors with an above-average dividend yield. CIBC’s dividend yield currently stands at 5.42% of the share price with a price-to-earnings (P/E) ratio of 9.12, less than the industry average P/E of 10.89. The P/E ratio prices each dollar of earnings to help investors determine the actual market value of a company’s stock.

Known as one of the most financially solvent banks in the world, CIBC announced in a press release on July 9 that it plans to acquire Cleary Gull, a U.S. boutique investment advisory firm. Cleary Gull will add organizational expertise to CIBC in the technology and manufacturing industries.

Banks grow through exports

The United States remains a substantial market for Canadian financial firms due to low corporate tax rates. Nevertheless, Canadian banks, including CIBC, are still assessing how anti-abuse taxes (BEAT) and volatile U.S. trade policies will impact financials. While BEAT will have a minimal short-term effect on bottom-line profits, investors should watch how future tax treaties with the U.S. approach tax-deduction policies imposed on foreign enterprises.

BEAT is a minimum tax add-on to the U.S. 2017 Tax Cut and Jobs Act which curtails the tax benefits of allowable foreign payment deductions, but the policy conflicts with current tax treaties. The existing Canadian tax treaty with the U.S. exposes the taxable income to reduced BAP calculations; the financial implication of the reduced formula is still ambiguous.

Regardless of the final determination regarding BEAT’s influence on the bottom line, predictable interest rates in the financial sector make Canadian banks one of the safest investments for a TFSA or RRSP.

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Fool contributor Debra Ray has no position in any of the stocks mentioned.

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