Reinvesting dividends over decades is one of the most powerful ways to grow wealth. In fact, Canadian investors who consistently reinvest their dividends can see a significant boost in their overall portfolio value. Studies have shown that between 1986 and 2020, reinvested dividends accounted for 33% of the total returns in the Canadian stock market. Compounding those dividends over time leads to exponential growth, making this a critical strategy for long-term wealth building. So, let’s get started with one stock that investors can certainly reinvest time and again.
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Where to look
When looking for companies to invest in for the long term, investors should focus on strong, reliable businesses with a history of stable dividends. Canadian banks, for example, are some of the best options due to their robust performance and regulatory frameworks. These banks have consistently delivered solid returns to shareholders, with strong earnings momentum and regular dividend increases. Thus making them ideal for building a dividend-focused portfolio. Moreover, the banking sector’s stability, even during economic downturns, makes it a safer bet than more volatile industries.
Canadian banks also benefit from strong economic fundamentals and consistent growth. This includes Bank of Montreal (TSX: BMO), which makes a great investment. BMO has a long history of weathering market fluctuations while delivering shareholder value. In 2024, BMO reported a 19.30% year-over-year earnings growth, showcasing its resilience and ability to generate profits even during challenging times. Additionally, BMO’s dividend yield of 5.36% at writing is attractive to investors seeking reliable income streams. The bank’s focus on expanding its wealth management and capital markets divisions also provides avenues for growth, thereby making it a well-rounded investment option.
Why it’s safe
Now, let’s focus on why BMO is a great and safe investment. With a market capitalization of over $81 billion, BMO is one of Canada’s largest and most trusted financial institutions. Its forward price-to-earnings (P/E) ratio of 10.13 suggests that the stock is reasonably priced, thereby offering value for long-term investors. BMO’s balance sheet remains strong, with over $400 billion in cash on hand and solid earnings per share (EPS) of 8.69, thus indicating a healthy financial position. In the words of BMO’s chief executive officer, “We continue to deliver strong results for our shareholders, supported by disciplined expense management and our focus on growing our core businesses.”
BMO’s earnings momentum further highlights its strength as an investment. In recent quarters, despite challenges in the global economy, BMO has managed to increase its net income to $6.3 billion. The bank has also grown its revenue to $31.41 billion, maintaining stability despite a slight dip in year-over-year growth. This consistent performance is a testament to BMO’s solid business model, diversified revenue streams, and disciplined risk management strategies. These help it remain competitive in both Canadian and global markets.
Looking ahead
Looking at the bigger picture, BMO remains valuable as a long-term hold for several reasons. Its low price-to-book ratio of 1.01 suggests that the stock is undervalued relative to its intrinsic value. Thereby providing an attractive entry point for investors. Furthermore, BMO’s ability to maintain a strong dividend payout ratio of 69.51% shows its commitment to returning value to shareholders while still reinvesting in growth opportunities. With a history of delivering strong returns and a well-established presence in the financial sector, BMO is a solid choice for those looking to build wealth over time.
Building a long-term investment strategy with dividend-paying stocks like BMO can be a smart move for Canadian investors. By reinvesting dividends, you benefit from compounding returns over time, and with reliable options like BMO on the TSX, you can enjoy consistent income and growth. With strong earnings momentum and a commitment to dividends, BMO remains a stable and valuable choice for those looking to grow their wealth steadily.
