Some of the big Canadian bank stocks offer dividend yields of over 6%, which is enticing for Canadians who seek income. Actually, the big Canadian bank stocks are often held in long-term portfolios as core holdings, seeing as they are some of the most profitable businesses in Canada and tend to provide a reasonable rate of return for the long haul.
Canadian bank stocks yielding over 6%
The Big Six Canadian bank stocks experienced a market correction of about 16% from the 2022 peak. As shown in the stock price chart of BMO Equal Weight Banks Index ETF (TSX:ZEB) below, in the long run, the sector tends to become more valuable. So, it’s likely a long-term investment opportunity to buy the big bank stocks during market corrections.
ZEB data by YCharts
Currently, Bank of Nova Scotia (TSX:BNS) and Canadian Imperial Bank of Commerce (TSX:CM) both offer dividend yields of over 6%, which make them attractive for income. After all, they pay out eligible dividends that are taxed at lower rates for Canadian investors because of the Canadian dividend tax credit. Particularly, investors who want to boost their current income can consider both banks.
At $64.79 per share at writing, BNS stock offers a juicy dividend yield of 6.5%. Because of higher loan-loss provisions, its payout ratio is expected to be higher than usual at about 58% of adjusted earnings this year. The bank remains profitable and continues to grow its retained earnings, which could act as a buffer to protect its dividend if needed. As it stands, its retained earnings could cover about 10 years of dividends.
CIBC’s lower dividend yield (versus BNS), as demanded by the market, suggests it could be a lower-risk investment today. Specifically, CIBC stock offers a yield of close to 6.2% at $56.43 per share at writing. In terms of its dividend safety, it appears to be in a better position than Scotiabank, as its payout ratio is estimated to be about 50% this year.
The best Canadian bank stock for your money today
I believe the best opportunity available within Canada’s banking giants today is Toronto-Dominion Bank (TSX:TD). In normal markets, it would be a steal to grab quality bank shares for a dividend yield of 4%. Today, TD stock offers a dividend yield of 4.6%, making it more compelling for long-term investment — from both an income and total-return perspective.
The higher yield has to do with rising interest rates since 2022, making fixed-income investments better competitors for investors who are seeking income and thereby reducing the general stock market valuation, including depressing the valuation of dividend stocks.
TD stock is about 19% below its peak in 2022, as it has been weighed down by its exposure to the United States as well as other headwinds experienced by the sector. Namely, some economists believe a recession could occur in Canada and the United States sometime this year, which is driving the loan-loss provisions higher and thereby cutting into earnings. Doing the usual check, TD stock’s payout ratio is estimated to be sustainable at about 46%.
Toronto-Dominion Bank’s growth can be stunning in the short term, but in the long run, it can possibly grow its earnings by at least 7% per year. So, assuming no stock valuation expansion, for the long haul, it can deliver total returns of around 11.6%.
