What do you look for in a stock you are planning on holding for decades, virtually forever? Stability is a well-understood trait, but if the stock is too stable and offers very limited growth, you will most likely lose money holding it, especially once you account for inflation. If you add dividends to the equation, the stability factor becomes more appealing.
Because that reflects a stock that is highly likely to keep generating a passive income for you, and if it’s an Aristocrat, that income will also increase over time with yearly appraisals. And if there is a modest growth potential thrown in the mix as well, the collective return potential becomes more pronounced.
Several Canadian stocks offer a healthy mix of all three (stability, reliable dividends, and modest growth potential), but only a handful of them are worth holding for decades. One of those few is Bank of Montreal (TSX: BMO), the oldest incorporated bank in Canada.
The bank
Bank of Montreal was established in 1817, and after a few years as a regional bank, it expanded outward. It has a balanced geographic footprint right now, with about 900 branches in Canada and about a thousand in the U.S., where about 43% of its adjusted income (in the last 12 months) came from. It’s the eighth-largest bank in North America (by assets: $1.4 trillion) and caters to about 13 million customers.
It shares a lot of characteristic traits with the others in the Big Five. This includes stable dividends and an adequately long history of raising dividends. It has a massive U.S. footprint and a conservative operational style, making it resilient against weak markets. Its financials are quite healthy and its revenues have grown significantly in the past 10 years, though the net income has remained quite near to the historic levels.
The stock
Like most Canadian bank stocks, the dividends are one of its primary attractions. It has been growing these dividends for 11 consecutive years and at a decent enough pace. In just the last five years, it has grown its payouts by about 46%, and at this pace, it’s expected to double your dividend income by roughly 10 to 11 years.
The dividends are safe enough, considering its payouts ratio for the last 10 years, with just one exception (2023).
But its overall return potential is more than just about the dividends. The stock has grown by about 47.5% in the last 10 years, which is decent enough for a Canadian bank. The combination makes it a healthy pick for decent long-term return potential.
Foolish takeaway
Unlike most other banks that went through a bull market phase in 2024, the Bank of Montreal is bearish. It’s still trading at a 6% discount from the beginning of the year and about a 20% discount from its 2020 peak. It may turn things around quite soon, so buying now and locking in the 5% yield might be a smart thing to do.
