Blue-chip Canadian stocks offer you a low-cost way to begin a steady stream of passive income. Most blue-chip TSX stocks have a tasty dividend yield, a wide economic moat, stable cash flows, and a tested business model. Further, these large-cap giants are part of mature industries and have widened their earnings base consistently, resulting in higher dividend payouts over time.
One such dividend stock is Bank of Montreal (TSX:BMO), which currently offers you a forward yield of 4.8%.
An overview of Bank of Montreal
Valued at $90 billion by market cap, Bank of Montreal is among the largest companies in Canada. With $1.3 trillion in total assets, it is the eighth-largest bank in North America, serving 13 million customers globally.
It operates a commercial banking business with a top-four position in North America. Further, BMO’s personal banking business continues to enjoy a strong deposit base and growing market share. A diversified high-margin wealth business and a competitive capital markets franchise indicates BMO is well-positioned for growth in 2024 and beyond.
The bank generates 59% of its revenue from Canada and the rest from the U.S. Around 52% of net revenue is derived from customers and 48% from businesses.
BMO is the longest-running dividend-paying company in Canada. In the medium term, BMO expects to grow adjusted earnings between 7% and 10% annually, which should result in dividend hikes. In the last 20 years, BMO has raised dividends by 7.6% annually, which is particularly attractive for a company in a cyclical sector.
How did BMO perform in fiscal 2023?
In fiscal 2023 (ended in October), BMO reported adjusted net income of $8.7 billion or $11.73 per share, down from $9 billion in 2022 or $13.23 per share. Due to an uncertain macro environment, BMO and its peers were forced to boost their liquidity position and offset higher delinquency rates. It ended 2023 with a provision for credit losses or PCL of $1.5 million, up from just $313 million in the year-ago period.
This impacted the bottom line, lowering BMO’s return on equity from 15.2% to 12.3% in the last four quarters. However, BMO ended 2023 with a CET1 (common equity tier 1) ratio of 12.5%, which is higher than regulatory requirements. The CET1 ratio showcases a bank’s ability to handle economic downturns, and a higher ratio is favourable.
Analysts tracking BMO stock expect earnings per share to expand by $12.08 per share in fiscal 2024 and $13 per share in fiscal 2025. So, priced at 10.1 times forward earnings, BMO stock is quite cheap and trades at a discount of 8% to consensus price target estimates.
The Foolish takeaway
BMO pays shareholders a quarterly dividend of $1.51 per share. So, to earn $500 a quarter or $2,000 in annual dividend income, you need to buy 332 shares of the company, which would cost you $41,765.60 at the time of writing.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Bank of Montreal | $125.80 | 332 | $1.51 | $501.32 | Quarterly |
In case BMO increases its dividends by 7.5% annually, your payout should double within the next 10 years.
However, investing such a significant amount in a single stock is quite risky. You should identify similar companies with strong balance sheets and diversify your dividend portfolio in the process.
