There’s a reason why bank stocks are some of the most popular investments that Canadian investors love to buy.
Bank stocks are some of the most reliable long-term holdings on the TSX, with steady earnings, strong competitive positions, and decades of consistent dividend growth. Two of the most popular choices are Royal Bank of Canada (TSX:RY) and Bank of Montreal (TSX:BMO), and deciding between them is often the hardest part for investors.
Both banks have delivered impressive long-term returns. Over the last decade, Royal has earned investors a total return of 321%, which is a compound annual growth rate (CAGR) of 15.5%. Meanwhile, BMO has earned a total return of 250% over the last 10 years, a CAGR of 13.3%.
Therefore, although they often move in tandem, as shown in the chart below, they are not identical. They differ in size, strategy, valuation, and yield. So, if you’re thinking about adding exposure to Canadian bank stocks, let’s see which is the better stock to buy today.
How do BMO and Royal Bank differ operationally?
One of the biggest differences between Royal and BMO is the scale of the two companies. While BMO is still a massive $125 billion company, Royal is more than double its size with a market cap of more than $300 billion.
Therefore, one of the key differences is that Royal’s size gives it broad diversification across many segments, including retail banking, wealth management, insurance, and capital markets. That scale typically translates into more stable earnings, which is a big reason why investors view RBC as one of the safest Canadian bank stocks you can buy.
And while Royal has U.S exposure as well, BMO also has a more noticeable U.S. footprint, which gives it growth opportunities outside Canada but also exposes it more to U.S. economic conditions.
Because of these differences, RBC is generally seen as the steadier, more predictable operator, while BMO is often one of the best Canadian bank stocks to buy for investors who want value or believe its smaller size and exposure to the U.S. market offer stronger long-term growth potential.
Which is the best bank stock to buy now?
Deciding between Royal Bank and BMO ultimately comes down to your preferences, investing goals and, of course, each of the companies’ valuations. Furthermore, dividends play a significant role as well in helping investors decide which is the best Canadian bank stock to buy for their portfolio.
Currently, Royal Bank’s forward dividend yield is 2.9%, well below its five-year average of 3.8%. That’s not necessarily surprising, though, given Royal’s valuation. It’s currently trading at a forward price-to-earnings (P/E) ratio of 14.3 times, which is the highest it has traded over the last five years and well above its five-year average forward P/E ratio of 12.0 times.
BMO, on the other hand, is cheaper than Royal, as it usually is. However, compared to historical standards, it’s also considerably expensive today. BMO currently trades at 13.5 times its forward earnings. That’s not the most expensive it has traded at in the last five years, but it is well above its five-year average forward P/E ratio of 10.8 times. So, even though BMO offers a higher yield of 3.7% today, it too is well below its five-year average of 4.3%.
In addition to the valuation and the current dividend yield today, dividend growth is also a main factor in determining which is the better Canadian bank stock to buy now.
And while Royal has a longer dividend growth streak than BMO, both have increased their dividends consistently for over a decade. Furthermore, in the last five years, BMO has increased its dividend by 54%, compared to Royal Bank, which has increased its dividend by 43%.
So, it’s clear that Royal is the better Canadian bank stock to buy if you want stability and reliability, while BMO is the stronger choice for investors looking for a bit more long-term growth potential.
Either way, both banks are excellent businesses and will likely move closely together over time. However, with both trading at elevated valuations today, the smarter move may be to wait for a more attractive entry point.
