Fortis (TSX:FTS) and Bank of Montreal (TSX:BMO) are two of Canada’s top dividend stocks with long histories of stable and growing distributions. Retirees and other investors looking for passive income and total returns are wondering if FTS stock and BMO stock are now undervalued and good to buy for a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Fortis
Fortis operates $65 billion in assets, of which 93% is involved in the transmission and distribution of electricity and natural gas. These are rate-regulated businesses that provide essential services to millions of homes and businesses across Canada, the United States, and the Caribbean.
Fortis traces its history back to 1885, when it started out as the St. John’s Electric Light Company in what is now Newfoundland and Labrador. The current business was incorporated in 1987 as a holding company with $390 million in assets. Acquisitions and organic projects have combined to build Fortis into the major utility it is today.
Fortis is working on a $22.3 billion capital program that is expected to increase the $34 billion rate base as of mid-year 2022 by an average of about 6% per year through 2027. The resulting cash flow growth should support targeted annual dividend increases of 4-6% over that timeframe.
Fortis has raised the dividend in each of the past 49 years.
Fortis trades below $56 per share at the time of writing compared to $61 a few months ago. Investors can take advantage of the dip to secure a 4% dividend yield and wait for the annual dividend increases to boost the return on the initial investment.
Buying Fortis stock on pullbacks has historically proven to be a savvy move for patient investors focused on generating attractive total returns.
Bank of Montreal
Bank of Montreal’s share price has been on an upward trend for the past two months, as bargain hunters realized the pullback was probably overdone. At the time of writing, Bank of Montreal trades near $121 per share. That’s up from $113 in May but still down from $136 in February and the $150 it reached at the peak in 2022.
Bank of Montreal is betting big on the U.S. economy. The company closed its US$16.3 billion takeover of Bank of the West in early 2023, right before the meltdown in the valuations of American regional banks. Bank of the West added more than 500 branches and gave Bank of Montreal a strong foothold in California. Investors might be concerned that Bank of Montreal paid too much, but the long-term benefits should pan out for shareholders.
Bank of Montreal handed out its first dividend in 1829. Investors have since received a distribution every year. That’s an impressive track record when you consider all the financial upheavals that have occurred over the past two centuries.
Bank stocks could see ongoing volatility over the next 12-18 months, as the economy adjusts to the sharp interest rate hikes in Canada and the United States. At this point, economists generally think the U.S. Federal Reserve and the Bank of Canada are on track to get inflation under control without forcing the economy into a severe recession. If a soft landing turns out to be the reality, Bank of Montreal is probably oversold right now.
It is probably a bit early, however, for the central banks to waive the victory flags, and investors in bank stocks need to be prepared to ride out some additional turbulence. The full impact of the rate increases likely hasn’t materialized yet, and a sharp economic decline followed by a spike in job losses is still possible. In that scenario, defaults on commercial and residential loans could surge, and bank stocks could retest recent lows.
Investors can currently get a 4.85% dividend yield on BMO stock.
Is one a better pick?
Fortis and Bank of Montreal pay attractive dividends that should continue to grow. Both stocks look fairly priced at their current levels and should be solid buy-and-hold picks.
That being said, I would probably make Fortis the first choice right now. Bank of Montreal has enjoyed a nice bounce, and while the stock could go higher, investors might see a better entry point emerge in the coming months.
