Canada’s financial sector is the safest in the world, and the TSX is among the attractive markets for investment because of the Big Six. The term refers to the country’s six largest banks, all with a national presence and international exposure. National Bank of Canada (TSX: NA) is the smallest in the group by market cap but is equally influential.
Performance-wise, the $33.16 billion bank delivered the highest total return (as of October 2022) in the last five (12.3%) and 10 (10.2%) years compared to its larger peers. Thus far, in 2023, it’s also the top-performing big bank stock with an 8.72% year-to-date gain. At $98.16 per share, the dividend yield is 4.1%.
Fortune builder
National Bank’s dividend track record and dividend growth history are mighty impressive. If investing long term, you can transform $1,000 into a fortune by accumulating more shares through dividend reinvesting.
Given the bank stock’s current share price and dividend yield, your $1,000 will generate $41 in annual passive income ($10.25 every quarter). However, if you don’t collect the quarterly payouts and instead reinvest them, the money will grow to $1,041 in one year (principal + dividend).
Let’s assume the dividend yield remains constant, and you repeat the process. You’d have $1,083.68 by the end of the second year, $1,128.11 in three years, and so on. Because of the power of compounding, the principal earns a return, and then the dividends, when added to balance, earn as well.
The resulting figures are small, although if you magnify the investment amount by 20 times or $20,000, the final balance will compound by 226% or $45,220.85 in 20 years, including dividend reinvestment.
National Bank’s yield isn’t high but you can expect growing payouts given the quality of its dividend history. Based on published data, NA’s distributions grew 9.4% annually from 2013 to the present. More importantly, dividends are sustainable as they are well covered by earnings (40.60% payout ratio).
Local and international exposure
National Bank’s domestic customer base comprises individuals, small- and medium-sized enterprises (SMEs) and large corporations needing financial services, banking and investment solutions. The bank provides specialized services internationally (U.S., Europe, and other markets).
Management warns clients to expect a lethargic Canadian economy over the next year. However, its chief executive officer (CEO) Laurent Ferreira said, “Our defensive posture with strong capital and liquidity positions and prudent levels of allowances for credit losses will continue to support profitable growth and help us navigate the uncertainty that may lie ahead.”
In the first quarter (Q1) of fiscal 2023, profit declined 4.7% (the tiniest percentage drop among the Big Six) year over year to $847 million. Notably, the provision for credit losses jumped 2,733.3% to $85 million versus Q2 fiscal 2023. Still, Barclays analyst John Aiken said NA navigated the pressures from revenue growth and expense inflation better than most of its peers.
The latest development is an investment in the high-growth recyclable packaging sector. National Bank Private Investment is now a shareholder and major partner in Induspac Croup. The latter is a leading designer and manufacturer of customized industrial packaging.
Amass a fortune
National Bank is more than a decent asset due to its stable and increasing payouts. You can start with $1,000 and increase your holding gradually if you want to amass a fortune.
