Best Canadian Bank Stocks – January 2020…

Canadian investors have one thing in common: Canadian Banks. If you ask any Canadian dividend investor, you will find at least one bank. For many, it’s a core holding and it’s also what I suggest for a beginner portfolio. If you hold ETFs, chances are the banks are some of the largest holdings within the ETF and more so with a dividend ETF.

It’s an investment that will provide stock investors some growth with a decent dividend yield while limiting the downside. It’s a great way to start investing and to secure income when interest rates are low. If, or when, interest rates go up, the banks also profit for a win-win situation. The major banks are Canadian Dividend Aristocrat (5+ years of dividend increases) and if it was not for the change in financial requirements back in 2009, they probably would have made it to the Canadian Dividend Achiever list with 10 years of dividend increases. The S&P had to adjust the rules for a Canadian Dividend Aristocrat qualification as losing the large banks back in 2009 would have had a major impact on the ETFs tracking the aristocrats.

Canadian Bank Stocks

Here is a list of the contenders that pay a dividend. The list is sorted by market capitalization as a starting point.

Best Canadian Banks

When looking for a bank as an investment, there is a quantitative and a qualitative analysis that needs to be done. The quantitative makes it easy to compare the banks side by side but the qualitative is where you can assess if the choices made by the CEO and the management teams are the right one for growth.

When you look at the basics, they all perform the same business with similar fee models. That includes the big banks with international presence along with the regional bank. The competition is for your banking, mortgage, loans and credit card business. Similarly, there are business loan competition which, in many cases, require larger banks.

What separates the big banks from the smaller banks is the wealth management and international exposure. The big banks all offer their own investment products. The bigger banks compete with insurance companies on this front and independent asset management firms. The last growth prospect the large banks have forayed into is for an international presence and growth in customers.

When you look at the big banks, there are 2 questions you want to ask from a qualitative perspective.

• Is the bank operation efficient?
• Is the growth plan something you believe in?

Canadian Bank Investing Strategy

There is a theory that you just buy the highest yielding bank as it implies it’s out of favor and once it bounces back you will profit. For safety reason, it’s recommended that you follow this strategy with the big banks only.

Top 5 Canadian Banks

Going by the Dividend Snapshot Opportunity Score – a pure quantitative approach – the following are the top banks.

CIBC

TD Bank

Scotia Bank

Laurentian Bank

Royal Bank

Royal Bank is a diversified financial services company offering personal and commercial banking, wealth management, insurance, investor services, and capital markets products and services. It is one of Canada’s largest banks. Royal Bank also ranks amongst the largest banks in the world based on market capitalization. It serves 16 million clients in Canada, the U.S., and 34 other countries. By geography, Canada is its largest market accounting for 61% of revenues, followed by the US (23%) and other countries (16%). Royal Bank has a large set of diversified customers ranging from corporate and institutional to high net worth clients. The bank has five business segments – personal & commercial banking (49% of earnings), capital markets (21%), wealth management (18%), insurance (7%) and investor & treasury services (5%). It maintains a good balance of assets having nearly 50% retail and 50% institutional assets. Royal Bank operates through the largest financial distribution and branch network in Canada along with leading client franchises.

Investment Data

Opportunity Score Formula

The top 10 stocks identified above are based on a score calculated using a number of financial data points from the companies. In the end, the score is generated from following five key indicators:

• 52-Week Range: Trend over the past 52 weeks. Is the stock pulling back from a 52 week high?
• P/E Ratio: Is the stock price running away from its earnings?
• Revenue Growth: Is the revenue growing? Growing revenue is important. We don’t want to be fooled by share buybacks and cost management only.
• Dividend Yield: Is the yield attractive? Usually could identify a pullback if the yield starts to go up or major trouble if it goes too high.
• Dividend Growth: Uses dividend growth and the Chowder Rule. Is the company capable of growing the dividend consistently?
• Dividend Payout Ratio: Uses historical averages to put today’s ratio in perspective. Is the company able to grow the dividend at the same rate it increases its earnings?

The generated score is meant to assess an entry point opportunity based on historical and today’s numbers. It completely ignores the business quality, the quality of the company is for every investor to assess. My stock selection process breaks down the quantitative and qualitative assessments investors should establish to pull the trigger before buying.

If you are interested in more details, the Canadian Dividend Screener provides many more data points to help make your investment decision.

Dividend growth investing works and you can generate a healthy retirement income but you have to buy individual stocks. If you are not comfortable with holding individual stocks, you can always buy dividend ETFs or consider different passive income ideas to generate a retirement income.