Opening a Tax-Free Savings Account (TFSA) makes sense because of its tax-free money growth feature or exemption from taxation. You can maximize the annual contribution limits (if possible), park eligible investments like dividend stocks in your account, and see your savings grow to a substantial retirement fund or nest egg.
Canada’s banking sector is a bedrock of stability, and I think most TFSA investors have at least one big bank stock in their account.
However, if dividend safety and reliability are the criteria, Bank of Montreal (TSX:BMO) stands out. There are compelling reasons to invest in the country’s third-largest bank after Royal Bank of Canada and Toronto Dominion Bank.
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Oldest bank
BMO was founded and formed in 1817 by a group of merchants. The 207-year-old lender helped shape and fuel Canada’s financial progress and growth. What transpired after 12 years after the founding is why you can buy and hold the stock in your TFSA. Its size has grown to $84.85 billion, market cap as of August 15, 2024.
Dividend pioneer
BMO declared a stock dividend in 1829, and paying dividends to shareholders is in its DNA to this day. The record is unmatched in Canada, and no Canadian will outlive the 195-year dividend track record. Today, the big bank stock and dividend pioneer trades at $116.35 per share and pays an attractive 5.33% dividend.
Let’s assume your available TFSA contribution room is $95,000, the cumulative limit from 2019 to 2024, and you have the same amount to invest in BMO today. If the yield remains constant and you keep reinvesting the quarterly dividends, your TFSA balance will swell to $273,920.30 in 20 years.
Moreover, you’d receive $3,077.14 in tax-free quarterly passive income in 2044 while your principal remains intact. BMO continues to give back to shareholders regardless of the economic environment. The big bank will keep TFSA users, income-focused investors, and retirees whole on its dividend commitment via the uninterrupted income streams.
Top 10 U.S. bank
Following the completed acquisition of Bank of the West, BMO is now a top-10 bank across the border. It has a strong position in three of the top five U.S. markets and an expanded footprint (32 states). Fitch Ratings believes the high degree of product, revenue, and geographic diversity supports BMO’s business profile.
The high barrier to entry in Canada’s concentrated banking sector is a competitive advantage. It also has a significant loan and deposit market share in the home country.
Positioning for long-term growth
In the first half of fiscal 2024 (six months ending April 30, 2024), net income increased 63.2% year over year to $3.16 billion. Also, in the second quarter (Q2) of fiscal 2024, the provision for credit losses (PCL) decreased 45.11% to $705 million versus Q2 fiscal 2023.
According to Darryl White, chief executive officer of BMO Financial Group, management is positioning the bank for long-term growth. “We’re building on a powerful platform that delivers competitive and differentiated products, advice and digital tools across our North American footprint,” he said.
Sustained payouts
White describes the Bank of West deal as a natural step in BMO’s North American growth strategy. However, for TFSA investors, it is an assurance of sustained dividend payouts for years.
