When you are planning on starting a passive income in Canada with dividend stocks, one market segment that most Canadians are attracted to is bank stocks, and it’s easy to see why. All six of the biggest banks in Canada are dividend stocks, and some have a consistent history of paying dividends for well over a century.
So, when looking into Canadian banking stocks for dividends, the top two candidates right now are the two highest dividend payers in the banking sector.
Bank of Nova Scotia
Currently, Bank of Nova Scotia (TSX: BNS) is the biggest dividend payer in the Canadian banking sector. It’s currently offering a dividend yield of about 6.2%, which is almost a percentage point higher than the next most generous bank.
The payout ratio is healthy as well. However, the reason behind this high yield is that it’s the slowest time for banks to recover from the slump that most Canadian banks experienced a few months ago.
It has grown over 23% from its low in October 2023, and while the momentum seems healthy enough, the pace is relatively slow. It’s still about 26% down from its 2022 peak, which also makes it the most heavily discounted bank stock in Canada right now.
Assuming it makes a full recovery and carries the growth momentum forward beyond the recovery phase, the capital-appreciation potential coupled with its yield makes it a compelling pick.
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (TSX: CM) is currently the second-highest dividend payer in the banking sector in Canada and has a yield of about 5.27%. The stock experienced a relatively swift recovery from its slump — about 41% from its low point in October 2023. So, the stock is still discounted (about 17%) but not as heavily discounted as the Bank of Nova Scotia.
Another edge stock has over BNS is valuation, which is slightly more attractive than BNS. The overall returns of the bank in the last 10 years are about 136%, which is significantly higher than BNS’s 73% returns over the same period. This is considerably more than what the bank’s current swift recovery can account for.
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Foolish takeaway
While both stocks are reeling from a bear market phase, the pace and momentum of the recovery is different. If we look into factors like the recovery pace, past return potential, current yield, and valuation, CIBC seems like the better option out of the two.
However, it’s also a subjective choice. For people more interested in dividends, the higher yield of CIBC may make it the right pick for them, especially considering the minimal difference between the dividend growth of the two banks.
