As one of the Big Five Canadian banks, Bank of Montreal (TSX:BMO) is a blue-chip stock to own for stable returns. That is, investors could sit on their shares, count on earning passive income from its quarterly dividend and expect the stock price to rise over time.
That said, since around 2021, the stock has been stuck trading sideways, primarily in the range of $110-130 per share. This year, so far, the stock has hit as high as around $130. Is BMO stock a buy at the pullback to around $117?
Let’s explore the idea.
According to YCharts, over the last decade, the dividend stock has delivered an annualized rate of return of about 8.8% per year. In other words, an initial investment of $10,000 would have transformed into approximately $23,210, including returns from the dividends.
BMO 15-year Total Return Level data by YCharts
If the same initial $10,000 investment took place 15 years ago, it would have returned close to 11.3% per year, transforming into about $49,700. In hindsight, 2009 turned out to be one of the best years to invest because there was a stock market crash from the global financial crisis that led to a recession after which there was a decade’s long run in the market.
BMO is a long-time dividend payer that started paying dividends in 1829. Its five-, 10-, and 15-year dividend-growth rates are 8.9%, 7.0%, and 5%, respectively. Notably, during times of recessions, the regulator would suggests our big banks to freeze their dividends to increase reserves to support the soundness of our financial system. So, for example, BMO froze its dividend from fiscal 2010 to 2012.
An investment made in BMO stock five years ago would have started with a dividend yield of about 4%, and the yield on cost would be 6.1% today.
An investment made 10 years ago would have an initial dividend yield of about 4%, and the yield on cost would be 7.9% today.
An investment made 15 years ago would have started with a dividend yield of about 6%, and the yield on cost would be close to 12.5% today.
In the above scenarios, no additional investments are made after the initial investment. They are meant to illustrate that investors could earn growing passive income from BMO stock without having to lift a finger as long as the bank continues to pay out a safe and growing dividend. The concept becomes more powerful the longer you hold the shares.
Let’s visualize the last scenario in which after 15 years of investment, investors would earn more than 12.5% on their investment every year from the dividends alone. Of course, after this many years, the bank also earns more profits so the stock price has also gone up.
BMO’s recent results have stumbled with a 13% drop in its adjusted earnings per share in the first half of the fiscal year. Its dividend is still safe with a payout ratio of about 57% of adjusted earnings this year, but the stock is down about 10% from its high this year as well.
At the recent quotation of $116.89 per share, the bank offers a nice dividend yield of 5.3%. It also trades at a reasonable price-to-earnings ratio of about 10.5. So, it’s not a bad time to buy some BMO shares as one of the holdings for investors who want low maintenance for their diversified portfolios. In fact, analysts think the stock trades at a discount of about 10%.
It’s possible for the stock to deliver long-term returns of about 10% per year over the next five to 10 years using a reasonable assumption of a 5.3% dividend and growth of 4.7%. Assuming it does, an investment today would double investors’ money in a little more than seven years according to the Rule of 72.
