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Why Canadian Banks Could Outperform the Market This Year

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Big Canadian banks have tended to be great long-term investments. These banks are among the most stable in the world and have provided excellent income growth over time.

Recently, Canadian banks had an absolute blowout quarter for earnings. These blowout earnings were driven mainly by lower provisions for credit losses. However, improving economic conditions in North America and globally bode well for these banks.

Among the top Canadian banks investors should consider right now, Royal Bank of Canada (TSX:RY)(NYSE:RY) and Bank of Montreal (TSX:BMO)(NYSE:BMO) are two of the top options right now.

Here’s why.

Royal Bank of Canada

As the biggest bank in Canada, Royal Bank takes top spot in many investor portfolios for good reason.

This global banking giant has a massive presence in Canada and abroad. The company’s diversified revenue streams spanning a number of global markets makes this stock a defensive gem. Indeed, compared to the bank’s Canadian peers, Royal Bank is among the most well rounded of the pack.

The company’s long-term EPS and dividend growth are reason enough to own this gem. Indeed, once divided hikes are allowed again, I expect Royal Bank to continue delivering more value to shareholders. The company’s dividend yield of 3.4% is juicy, particularly when compared to fixed-income alternatives. I view Royal Bank as a bond-like proxy in this market. Accordingly, those seeking defensiveness can’t really do much better than this stock today.

Bank of Montreal

Another globally diversified Canadian bank, BMO is a great long-term pick.

Indeed, this company’s geographical diversification is one key reason why many investors own this stock. BMO is a bank with an emphasis on growing its business outside of Canada. Accordingly, BMO has been on my radar for some time as a diversification play.

As interest rates are poised to rise, both BMO and Royal Bank are set to outperform. Should credit quality and loan volumes pick up, we could see organic growth with these names the likes of which we haven’t seen in some time.

BMO’s dividend yield of 3.3% is slightly lower than that of Royal Bank. That said, both banks are of the highest-quality options in Canada. Accordingly, I view these yields similarly, as bond proxies right now.

Bottom line

In this environment, picking banks with highly diversified revenue streams and a global presence goes a long way. Indeed, both Royal Bank and BMO are two excellent options for investors looking for stability and bond-like income today.

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 Chris MacDonald has no position in any stocks mentioned in this article.

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