Looking For The Best Canadian Bank Stocks? Look No Further
Regardless of your investment philosophy, most Canadian retail investors will have one thing in common when it comes to their portfolios; they include Canadian bank stocks. Why? Well, for starters, every one of these banks on this list is a Canadian Dividend Aristocrat, and is also included in the large majority of Canadian index etfs.
What should I look for when picking Canadian Bank stocks?
We alluded to it earlier, but there are two main groupings of Canadian banks, the Big 5 and the smaller regional players. The Big 5 are not only the largest Canadian bank stocks by market capitalization, but they also have operations south of the border and many have international operations. That is why investing in Canadian bank ETFs has become fairly popular around the world.
On the other hand, the regional banks are mainly focused on the Canadian market with little to no international operations.
Interest rates are always a hot topic and rising interest rates are a positive for banks. Rising rates result in a larger spread between lending rate to customers and the rate to which it pays its debtors.
As a result, they have a positive impact on profitability as net interest income (NII) margins rise. Banks in which retail earnings account for a high percentage or income will be best positioned to benefit.
Canada’s bank stocks pay rich dividends
You can’t have a conversation about banks without discussing dividends. Canada’s banks were the envy of most when, unlike their U.S. peers who slashed dividends, they managed to weather the financial crisis without cutting their dividends.
The question now becomes, who is best positioned to continue raising dividends and at what rates? Look for banks that have raised for at least 5+ years and have a clear dividend policy. If you’re looking for some of the best dividend stocks to buy, check out our list of the top 36 in Canada.
If you’re looking for more consistent income, have a look at our list of the best Canadian monthly dividend paying stocks.
The Canadian financial industry has high barriers to entry
The Canadian banking market is highly regulated and as such, there are massive barriers to entry.
The Big 5 are incredibly important to the Canadian economy as are some of the smaller regional players such as National Bank of Canada and Western Bank.
A Canadian bank stock can serve as a cornerstone of one’s portfolio, is low-risk, provides growth and a steady income. After weathering the financial crisis better than most all world-banks, the Canadian banks were also among the first to re-instate a rising dividend.
If you’re interested in more top stock lists, check these ones out!
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The Best Lithium Stocks
Tech Stocks To Buy Right Now
Top Canadian Lumber Stocks
Top Canadian ETFs
The Best Canadian Bank Stocks To Own In 2020
6. Canadian Imperial Bank of Commerce (CM.TO)
CIBC (TSX:CM) is a global financial institution. As one of Canada’s Big Five, it provides a range of financial products and services to over 11 million individual, small business, commercial, corporate and institutional clients.
CIBC has made large acquisitions south of the border over the last couple of years, and the U.S. market, which as of now has a stronger economy, should drive more growth and diversify the company’s operations. CIBC has the largest yield out of any Canadian bank stock on this list at 5.35%.
The company has a payout ratio of 51.30%, close to its target of a 50% payout ratio. CIBC has a 5-year dividend growth rate of 7% and has raised dividends consecutively for 9 years. CIBC is the cheapest Canadian bank stock on this list and has been for a few years running.
The company is trading at a forward price to earnings of only 8.90 and only 1.35 times book value.
Analysts have placed a 1-year target price on the stock of $114.20, which indicates nearly 7% upside. Add that to the dividend yield and total upside potential could flirt with 13%. Investors will have to keep an eye on CIBC’s growth south of the border, as the bank has often been criticized for being too exposed to the Canadian economy.
Investors are hesitant because of this exposure, and as such CIBC was the worst performing bank in both 2018 and 2019 and has been one of the worst performing Canadian banks in the past 5 years.
YTD Gain: -8.3%
Payout Ratio: 50.62%
1Yr Target Price: $113.26
5. Goeasy Ltd (GSY.TO)
Goeasy Ltd (TSX:GSY) was placed on this list of the best Canadian bank stocks primarily due to the surge in alternative lending use.
The stress test placed among Canadian buyers recently has reduced their buying power by up to $70 000, and many are flocking to alternative lenders. Why? Well, because they don’t have to follow the strict regulations placed on major Canadian banks.
Goeasy has two major loan products today. The first, an unsecured loan, allows borrowers to get up to $10,000. The second, which is secured against real estate, can go as high as $30,000. The company is also experimenting with secured products that allow customers to rebuild bruised credit.
The firm plans to continue its strong growth in 2020 by expanding further in Quebec, creating partnerships with traditional retailers to offer financing solutions, and further expanding its trademark unsecured loan product.
Goeasy is a contrarian pick on a list of the best Canadian bank stocks, as most of the stocks found below are better suited for investors looking for income. However, you’d be surprised at how fast the Canadian small-cap alternative lender is growing its dividend. Goeasy has a 5 year dividend growth rate of 25%, and most recently raised its dividend by 40%.
It has raised dividends for 5 straight years, and currently provides a yield of 1.70%. In terms of growth, expect Goeasy to be one of the fastest growing Canadian bank stocks in the country. Analysts expect the bottom line to grow by over 34.90% next year.
The company is only trading at 10.17 times forward earnings and 3.11 times book value, so all things considered Goeasy is trading at a discount.
YTD Gain: -11%
Payout Ratio: 29.74%
1Yr Target Price: $77.20
4. Bank of Montreal
The Bank of Montreal (TSX:BMO) has the longest active dividend streak in Canada, paying dividends for more than 189 years.
The feat is simply incredible, speaking to both its longevity and consistency. The Bank of Montreal provides a wide range of banking services, including wealth management, investment banking, personal banking and business banking, in both Canada and the United States.
The company is currently ranked 4th out of Canada’s Big 5 banks in terms of market cap.
The company is actively looking to adapt to today’s investment trends, including launching its Smartfolio platform. Smartfolio is a Robo-Advisor platform, and BMO was the first big 5 bank to move into this part of the market, although it now has competition.
For those who are weary about the current state of the Canadian housing market, take note that BMO has the lowest exposure out of the Big 5 banks to the market.
The company currently has a dividend growth streak of 8 years and a solid payout ratio of 48.90%. BMO yields 4.18% at the time of writing and has a 5-year annual dividend growth rate of 5.2%. Analysts have placed a 1-year target price of $106.75 on the company, signaling 5.2% upside.
BMO currently trades at 10.23 times forward earnings and 1.41 times book value, making it one of the cheaper stocks on the list.
YTD Gain: -15%
Payout Ratio: 47.09%
1Yr Target Price: $104.54
3. Royal Bank of Canada (RY.TO)
The Royal Bank of Canada (TSX:RY) is Canada’s largest bank by market capitalization and was named the most valuable brand in Canada.
The company is the most internationally diverse Canadian bank stock with operations around the world. However, RBC is still very dependent on customers right here in Canada, with over 61% of its revenue coming from the country.
Royal Bank has captured the highest market share in several Canadian retail banking products, including Personal Lending, Total Mutual Funds, Business Loans and Deposits.
Over the last 5 years, RBC has returned 57.52% (9.5% annually, including dividends) to shareholders, making it one of the best performing Canadian banks.
The company has one of the best dividends in the country, yielding 4.02% at the time of writing. Royal Bank’s payout ratio is only 47.78%, and the bank has a 5-year dividend growth rate of 8%.
It has raised dividends for 9 straight years, with its most recent increase coming in at 7%. Analysts expect the bottom line to grow by 5.69% in 2020, and have placed a 1 year target price of $112.50 on the company, indicating upside of approximately 8%.
Couple this with a fairly reasonable valuation (11.2 times forward earnings and 1.91 times book value,) and you have one of the best Canadian banks to own today.
YTD Gain: -5%
Payout Ratio: 46%
1Yr Target Price: $112.70
2. Bank of Nova Scotia (BNS.TO)
The Bank of Nova Scotia (TSX:BNS) is the third largest Canadian bank by market cap. The company offers a wide variety of services to both Canadians and international customers.
With over 25 million customers and net assets close to $1 trillion, the Canadian bank has a very heavy Canadian and international presence. The Bank of Nova Scotia is one of the more aggressive Canadian banks in terms of acquisitions.
Since 2013, the company has spent over $13 billion on acquisitions and almost $7 billion of that has taken place since 2017. The Bank of Nova Scotia has since said it will be taking a break and focusing on integrating new acquisitions into the fold, however it still expects to grow both Canadian and international earnings by 7% and 9% respectively.
The company has the second highest dividend yield of all major Canadian banks at 4.98%, beaten only by CIBC.
It has raised dividends for 9 straight years and has a 5-year dividend growth rate of 6%. This is substantially lower than our number one stock TD Bank, but it is still a solid growth rate from an already high yielding stock. Scotiabank has been one of the worst performing Canadian bank stocks as of late. But there is good news.
Scotiabank is quite cheap, which usually indicates better than average upside potential. Shares trade at just 9.78 times 2020’s expected earnings. Add an analyst 1 year target estimate of $79.88, which indicates upside of nearly 15% (including dividends) from today’s price levels, and it is easy to see why the Bank of Nova Scotia is one of the best Canadian bank stocks to buy today.
YTD Gain: -8.2%
Payout Ratio: 51.98%
1Yr Target Price: $78.90
1. TD Bank (TD.TO)
TD Bank (TSX:TD) is our best Canadian bank stock to buy for the third year running.
TD Bank is a multinational banking and financial services firm which started operations in 1855. TD Bank is one of the largest banks in Canada by total assets and second largest by market capitalization.
The financial giant has operations in both Canada and the United States and was named one of the most convenient banks in the U.S. TD Bank has a very prominent set of operations in the United States, which make up more than 40% of its overall revenue.
This is beneficial to investors as it is not exposed to rising Canadian interest rates like other Canadian bank stocks. If Canada’s economy slows down, TD Bank still has its U.S. assets to drive revenue.
The company has benefited heavily from the reduction in corporate tax rates introduced into the United States in 2018 and looks to take advantage of a strong US Economy.
Over the last 5 years TD Bank has a compound annual growth rate of over 10% on its earnings and has a medium-term earnings growth target of around 7-10%, although we’re more likely to see tepid earnings this year because of a weaker Canadian economy. TD has posted the best growth rate of the major Canadian banks over the last 5 years.
The company current pays a yield of 4.04%, has raised dividends for 9 straight years and has a 5-year dividend growth rate of over 10%. The company’s payout ratio is only 47%, which is among the lowest in the sector. If you’re looking to invest in the best Canadian bank stock today, I’d be looking to pick up TD Bank. Keep in mind the company is traded on both exchanges. If you’re looking to purchase its U.S. ticker, we’d suggest using Norbert’s Gambit to save on exchange fees.
YTD Gain: -11%
Payout Ratio: 44.92%
1Yr Target Price: $80.18