When faced with two compelling investment options, investors often struggle with determining the better buy over the long term. This is particularly true when it comes to Canada’s big banks, which are known for their defensive appeal and long-term potential.
Fortunately, it doesn’t need to be hard. Here’s a look at two of the big banks that should be part of your long-term portfolio.
The case for BMO
Bank of Montreal (TSX:BMO) is neither the largest or most well-known of Canada’s big banks. What BMO is, however, is the oldest of the big banks, with a dividend-payout history that spans back nearly two centuries.
Today, BMO offers investors a juicy quarterly dividend with a yield of 4.45%. This means that investors with $40,000 in their portfolio to allocate to BMO can earn an income of $1,780.
That’s not all; investors with longer-term timelines can reinvest that income until needed. Reinvesting those dividends could provide a significant boost to any future retirement income. Investors should also keep in mind that BMO has provided annual bumps to that dividend for decades without fail (the one exception being during the pandemic).
But what makes BMO a good investment right now?
Over the trailing 12-month period, BMO is down nearly 5%. As a result, the stock boasts an insanely low price-to-earnings (P/E) ratio of just 6.43. Part of the reason for that continued slump can be attributed to the bank’s recent quarterly update.
In short, BMO performed better than expected but left investors concerned. Rapidly rising interest rates have forced banks like BMO to set aside larger amounts for credit loss provisions. Overall, the company earned $247 million in the quarter.
Again, the focus for investors here should be long-term, where BMO’s massive growth potential will really take off. That growth stems from the recently completed deal for U.S.-based Bank of the West. The deal expands BMO’s network to cover 32 U.S. states and propels the bank into its position as the eight-largest lender in the U.S.
The deal also adds billions in deposits and loans as well as over 400 additional branch locations in new markets, such as California.
Let’s talk about CIBC for a moment
The other big bank to consider is Canadian Imperial Bank of Commerce (TSX:CM). CIBC is smaller than BMO, but that doesn’t mean that investors should be dismissive of the company.
Like BMO, CIBC offers a stellar domestic segment as well as a growing international segment focused on the U.S. market. That being said, CIBC’s primary growth opportunity stems indirectly from its domestic market rather than the international segment.
CIBC has a larger mortgage book than its big bank peers. Historically this has made the bank a riskier option for some investors. Given the sudden rise in interest rates, that risk is visible in CIBC’s stock price.
As of the time of writing, CIBC trades at a whopping 20% discount over the trailing 12-month period. The bank also boasts a P/E of 12.18.
The drop in CIBC’s stock price provides a unique opportunity for prospective investors. In addition to the market pushing the stock lower, CIBC completed a stock split last year. While the event itself doesn’t create any value for investors, it does lower the cost of entry for new investors.
To put it another way, a $40,000 investment in CIBC today will buy just over 642 shares. Considering CIBC’s juicy 5.45% yield, investors can expect an income of $2,180 in just the first year.
If you throw in the potential growth to come as markets (and, by extension, CIBC’s stock price) rise, and investors have a great long-term income option to consider.
Better buy: Which is better for your portfolio?
No investment is without risk — hence the need to diversify your portfolio. In the case of the two banks mentioned, the higher risk of CIBC may be offset by future growth.
In my opinion, CIBC represents the better buy for long-term investors right now, which comes down to the higher yield, lower cost of entry, and larger upside potential.