Top Canadian Bank Stocks to Buy in October 2022

The big Canadian bank stocks can be a core part of your dividend portfolio. Buy them while they’re undervalued.

| More on:
edit Four girl friends withdrawing money from credit card at ATM

Image source: Getty Images

A heightened uncertainty in the economy from high inflation and rising interest rates has pressured Canadian bank stocks. Here are some top Canadian bank stocks that you can consider buying this month. They’re selected from the Big Six Canadian bank stocks.

The lowest-risk Canadian bank stocks

The market suggests that the top Canadian bank stocks with the lowest risk are National Bank of Canada (TSX:NA) and Royal Bank of Canada (TSX:RY). Their stocks have been the most resilient in this market downturn. Year to date, they have declined about 6% and 8%, respectively.

If you include dividend returns, they would be down 4% and 4.6%, respectively. Indeed, the two banks have achieved the highest earnings-per-share (EPS) growth rates in the last decade. Specifically, the growth rates were 9.9% and 9.5%, respectively.

As the leading bank with a diversified business, RBC stock also commands the highest premium valuation among the Big Six banks. This suggests the market views it as having the highest quality. RBC stock’s long-term, normal price-to-earnings (P/E) ratio is about 12.15. It targets a medium-term EPS growth of 7-10% per year. At $123.88 per share at writing, Royal Bank trades at about 11.2 times earnings. So, conservative investors could consider buying it now and on further weakness.

National Bank’s operations are more concentrated in Canada. Since the U.S. is already in a recession, and Canada is expected to enter a recession next year, the U.S. has the potential to first recovery from this recession. Therefore, it may be wiser to stick with RBC, as it’s more diversified.

Top Canadian bank stocks for total returns

Investors invest to make money. The big Canadian bank stocks have delivered stable earnings growth in the long run to deliver solid total returns. So, it makes good sense to explore them to see which may be the best for total returns.

Of the Big Six Canadian bank stocks, Bank of Nova Scotia (TSX:BNS) has fallen the most year to date by about 27%. At $65.34 per share, it trades at only about 7.7 times earnings. In other words, it’s undervalued by a third from its long-term normal valuation. The cheap stock also provides the biggest dividend of the bunch. Consequently, it has the potential to deliver the largest total return of 17.4% per year over the next five years. This assumes a 5% EPS growth rate, and the stock returns to its normal multiple.

Bank of Montreal is also discounted and can potentially deliver total returns of about 14.9% over the next five years. This is also an estimated above-average total returns.

BNS stock for current income

The big Canadian bank stocks all pay sustainable dividends. Some investors prioritize income over total returns. In this case, investors don’t have to choose between the two. As mentioned earlier, BNS stock provides the largest dividend of the Big Six Canadian banks. It can also deliver the highest returns over the next five years from the help of a low valuation today. It yields 6.3% at writing. With a payout ratio of about 48% this year, the bank maintains a safe dividend.

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 Kay Ng has a position in Bank of Montreal and BANK OF NOVA SCOTIA. The Motley Fool recommends BANK OF NOVA SCOTIA. The Motley Fool has a disclosure policy.

More on Bank Stocks

Bank sign on traditional europe building facade
Bank Stocks

3 Bank Stocks That Are Too Cheap to Ignore

These stocks appear attractive today and deserve to be on your radar.

Read more »

Bank Stocks

4 Things to Know About TD Stock in November 2022

Should you buy TD stock?

Read more »

Bank sign on traditional europe building facade
Bank Stocks

2 Bank Stocks to Load Up on in a Recession

Here are two top Canadian bank stocks investors may want to consider, particularly as we potentially head into a recession.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Canadian Bank Stocks: Time to Buy the Underdogs

Consider buying National Bank of Canada (TSX:NA) stock and another banking underdog on the way down.

Read more »

think thought consider
Bank Stocks

Should You Invest in Scotiabank Right Now?

There are plenty of great discounted stocks to buy right now, like Bank of Nova Scotia (TSX:BNS). Here's why you…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

The CRA Just Increased Tax Breaks – Here’s How to Invest for More Savings

Savings from tax breaks can be leveraged to buy blue-chip TSX stocks such as the National Bank of Canada in…

Read more »

Various Canadian dollars in gray pants pocket
Bank Stocks

2 Steady Blue-Chip Stocks to Earn Passive Income in 2023

Canadian blue-chip banking stocks such as BMO and BNS are trading at attractive multiples and offer tasty dividends to investors.

Read more »

Chalk outline of two arrows pointing in opposite directions
Bank Stocks

Should You Buy TD Bank Stock or Bank of Nova Scotia Stock Now?

Bank stocks look undervalued right now. Is TD Bank or BNS a better buy?

Read more »