Do you like to invest in stocks that pay regular dividend income?
If so, it pays to look into banking stocks. Banks – particularly Canadian banks – often have very high dividend yields, but without the high payout ratios that characterize other dividend sectors like REITs and pipelines. Most Canadian banks pay out 50% or less of their profit as dividends, leaving plenty of money left over to invest back into the business. In this article, I will explore three Canadian bank stocks that could be great banks for your buck.
Bank of Montreal
The Bank of Montreal (TSX:BMO) is one of Canada’s strongest banks right now in terms of growth prospects. It recently closed its deal to buy Bank of the West from BNP Paribas. Unlike other Canadian bank deals this year, it closed without a hitch, leaving BMO with better growth prospects than its competitors, which had their own U.S. deals cancelled.
Over the last five years, BMO has done better than most other Canadian banks in terms of growth. In that period, it has delivered the following growth rates in key fundamental metrics on a compounded annual (“CAGR”) basis:
- Revenue: 6.66%
- Net interest income: 9.7%
- Net income: 8%
- Shareholder’s equity (“book value”): 13%
These growth rates are well ahead of any of the other big six Canadian banks, making BMO the growth champion of large Canadian banks.
Royal Bank
The Royal Bank of Canada (TSX:RY) is Canada’s biggest bank by market cap. Despite being larger than its competitors, it’s also growing faster than most of them, having delivered 5.3% CAGR earnings growth over the last five years. While 5.3% might not seem like a rapid earnings growth rate, Royal Bank stock is pretty cheap, trading at just 11.4 times earnings. For a stock with not much growth priced in, RY has a solid growth rate.
Royal Bank, much like Bank of Montreal, announced a major acquisition recently. Earlier this year, it announced that it would be buying HSBC Canada from HSBC, one of Britain’s largest banks. The deal is valued at $13.5 billion and could add about a billion a year to RY’s profit. The deal has been delayed a few times already but because it concerns two Canadian banks, it is likely to close eventually.
TD Bank
The Toronto-Dominion Bank (TSX:TD) is a Canadian bank stock that I personally own, and would happily buy more of at today’s prices. It’s primarily a retail bank, operating a vast network of branches across Canada and the United States. It recently increased its investment banking footprint as well, by buying out the U.S. investment bank Cowen.
Speaking of the U.S.: TD Bank is well known for being the “most American of Canadian banks.” About 40% of its net income comes from South of the border. Most Canadian banks have investments in the U.S. market, but TD’s are the largest as a percentage of the total business. This gives TD a lot of growth potential, as U.S. financial services is a vast market with plenty of large regions (e.g., California) that TD hasn’t even started breaking into yet.
One disappointment for TD Bank’s executives this year was having the company’s deal to buy First Horizon cancelled by regulators. The deal was valued at $13.4 billion and TD hoped that it would add about a billion a year to its earnings. The cancellation of the deal was disappointing for TD’s managers, but it was probably a positive for shareholders, as TD offered a steep price for First Horizon (about 15 times earnings). Given what later happened with U.S. regional banks in the Spring 2023 financial crisis, it looks like TD inadvertently dodged a bullet.
