1 Magnificent TSX Dividend Stock Down 10.3% to Buy and Hold Forever

The Bank of Montreal (TSX:BMO) stock is undergoing a temporary weakness. Here’s why you can buy it for its 5.3% dividend yield, and more.

| More on:
A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."

Source: Getty Images

The Bank of Montreal (TSX:BMO) stock is experiencing what should be a temporary weakness this year. Down 10.3% year-to-date, the Canadian bank stock has significantly decoupled from the Hamilton Canadian Bank Equal Weight Index ETF’s performance since May 2024. Income-oriented investors may take this opportunity to load up on the magnificent TSX dividend stock and lock in a lucrative 5.3% yield before Bank of Montreal stock recovers to its historical performance levels.

BMO Chart

BMO data by YCharts

The Bank of Montreal remains a dividend darling after 195 years of consistent dividend payments, following two consecutive years of dividend growth that could form a foundation which ushers BMO stock into prestigious Canadian dividend aristocrat status. However, the eighth largest North American bank (by assets) is beaten down this year, and dividend investors could find good entry points for a multi-decade holding period of passive income.

Why is Bank of Montreal stock down?

The Bank of Montreal suffered an unexpected hit in its credit portfolio metrics this year. Heading into fiscal year 2024, BMO expected its provisions for credit losses (PCL) ratio to be in the 30 basis points range. However, subsequent earnings results have shown higher-than-expected provisions for credit losses, and the losses could worsen within the next six months.

What went wrong? The Bank of Montreal’s CFO, Tayfun Tuzun, discussed the challenge during the Barclays Global Financial Services conference this month. While the bank boasts over 55,000 corporate loan customers, 15 loans in its commercial loan book had issues and they accounted for about half of the impairments.

The troublesome loans originated during a period of market exuberance when cheap money flooded markets following the COVID-19 pandemic in 2021 and 2022. Lenders extended credit based on enterprise values to companies, including some private-equity-held companies with business models that thrived during the pandemic but are no longer as viable today.

Worse still, the loans were larger than BMO’s traditional lending profile, and most were shared national credits, meaning the bank had no direct client relationship with the debtors.

Although PCLs may peak over the next two quarters, the worst could be over within the next six months, and the bank expects a return to normalcy sometime in 2025.

A temporary setback?

The recent surge in loan impairments is unusual for the Bank of Montreal. Historically, BMO stock has outperformed peers in loan quality, with PCLs on impaired loans coming in lower than Canadian peer averages in 29 of the past 33 years. This year marks the fifth time BMO underperformed its peers on loan quality in more than three decades. The blip could be temporary.

The COVID-19 era, with its unique opportunities and challenges, is now behind us. Investors expect the bank to review its policies to prevent a repeat of the “deals” that contributed to its current loan health challenges.

Most noteworthy, BMO retains a high credit rating, is well-capitalized, remains profitable, and boasts strong market clout in commercial loans. Despite the recent spike in loan provisions, the overall loan book remains of good quality. The few affected loans will soon be a thing of the past as normalcy returns and the bank works towards achieving its 15% return on equity (ROE).

Why I’d buy BMO stock for the dividend

Canadian bank stocks are traditional sources of reliable and recurring investment income and have lived up to this promise for decades. They are among the well-established dividend-paying stocks that have anchored the TSX’s performance through all economic regimes, and the Bank of Montreal remains one of the best dividend stocks to buy on the TSX today.

The dividend yields 5.3% annually. Its earnings payout ratio has crept up close to 70%, but remains safe and should track back to historical levels of around 60% or below once the current headwinds pass.

Bank of Montreal stock has consistently paid quarterly dividends for 195 years. The bank has recently completed two consecutive years of dividend increases, and investors could expect growing dividend payouts if management sustains this new momentum.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Bank Stocks

clock time
Bank Stocks

BMO Is Paying $6.20 Per Share in Dividends: Time to Buy This Top Stock?

BMO (TSX:BMO) stock offers up a strong dividend yield that recently saw a 4% increase. So, is it time to…

Read more »

hand using ATM
Bank Stocks

Invest $7,000 in This Dividend Stock for $367 in Passive Income

Investors are encouraged to accumulate shares of solid dividend stocks like BMO stock on market pullbacks.

Read more »

Dice engraved with the words buy and sell
Bank Stocks

TD Bank Stock: Buy, Sell, or Hold Right Now?

Toronto-Dominion Bank (TSX:TD) stock is at a crossroads. Recent growth and steady dividends attract buyers to TD Bank stock, but…

Read more »

edit Sale sign, value, discount
Bank Stocks

Scotiabank Stock on Sale: Why Now’s the Perfect Time to Invest

Scotiabank stock offers high income and the potential for strong returns in the coming years.

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

RBC Stock’s Path to Doubling Your Investment: A Decade-Long Perspective

The Royal Bank of Canada (TSX:RY) or RBC stock has more than doubled investors' capital in 10 years and may…

Read more »

question marks written reminders tickets
Bank Stocks

Is TD Bank Stock a Buy in 2024?

TD Bank stock is trading 22% lower than its 2022 highs -- is this a good time to buy or…

Read more »

data analyze research
Bank Stocks

Bank of Montreal vs. Royal Bank of Canada: Which Canadian Bank Stock Is the Better Buy?

RY trades near a record high, while BMO is out of favour with investors.

Read more »

Glass piggy bank
Stocks for Beginners

3 Things You Need to Know If You Buy Canadian Western Bank Today

Canadian Western Bank (TSX:CWB) recently received approval to be taken over by National Bank, so what should investors do now?

Read more »