If you’re looking for a stable banking stock that pays a high dividend yield without billions of dollars in regulatory headaches and a sluggish mortgage lending market, the winning play may be to check out Canadian bank stocks.
Although Canadian banks face headwinds from mortgage lending, they are differentiating their offerings, expanding into higher growth areas like wealth management and boosting fee income.
On Friday, Royal Bank of Canada (RY) kicks off third-quarter earnings reports of the so-called “Big Six” Canadian banks. The other five banks — Bank of Montreal (BMO), Bank of Nova Scotia (BNS), National Bank of Canada (NTIOF), Canadian Imperial Bank of Commerce (CM) and Toronto Dominion Bank (TD) — report their quarterly earnings next week.
The bad news: some analysts are concerned that weak lending volume — particularly given cold-weather delays in home purchases — could weigh on earnings.
Although Canadian bank stocks have seen a run-up in price this year, the fundamentals and growth prospects are strong — I think these stocks still have further to fly. But not all Canadian bank stocks are alike — and the business mix, as well as reliable dividend payouts and high yields — must be considered. Here are three high-yield Canadian bank stocks to buy now:
High-Yield Bank Stocks: Bank of Montreal (BMO)
Current Dividend Yield: 3.9%
Year-to-Date Return: 12%
If you’re looking for Canadian bank stocks that reliably pay dividends, Bank of Montreal (BMO) is a pretty good bet — shareholders have been getting paid since 1829. BMO also hiked its dividend last quarter. That hike, combined with 10% revenue growth and net profit growth of more than 20%, make this stock look even more attractive to buy and hold now.
In terms of its business focus, BMO still has a strong position in retail banking and mortgage lending; however, the bank has also boosted its commercial and industrial lending by 8% year-over-year. That’s particularly noteworthy since it is increasingly going after commercial and industrial lending in the U.S.
BMO’s domestic retail operations are not nearly as prevalent as those of competitors like Royal Bank of Canada, but that may be a mixed blessing given the high debt load carried by many Canadian consumers. BMO’s winning play looks like asset management.
In May, BMO completed the acquisition of F&C Asset Management through its European asset management group BMO Global Asset Management. The deal gives BMO 24 offices in 14 countries and five continents — important considering that about half of BMO’s assets under management are for clients outside North America. The deal strengthens BMO’s global money management capability, upgrades its investment platform and increases cross-sell opportunities within Europe.
BMO stock is pretty hard to pass up when you factor in the nearly-4% dividend yield.
High-Yield Bank Stocks: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.1%
Year-to-Date Return: 11.5%
Canadian Imperial Bank of Commerce (CM) seems like the odd man out on this list: smaller than its rivals and with a laser-focus on retail banking and Canadian customers. Analysts also expect to see CM’s third-quarter profit slip by as much as 3% when it reports earnings on Aug. 28.
Still, CM is expected to report growth of at least 5% in Canadian lending – including consumer, commercial and industrial loans. Like its rivals, CM is increasing its attention on wholesale banking and wealth management — two cash cows that should keep churning out rich profits.
In a nod to the importance of CM’s wealth management business, the bank tapped that unit’s head, Victor Dodig, to become the bank’s next president and CEO, effective Sept. 15. Dodig has said he will be looking for acquisitions outside Canada — particularly in the U.S. Considering that wealth management already accounts for some 14% of CM’s profit, count on Dodig to target asset and wealth management
Conservative investors who are looking for reliable income will be rewarded by CM, which has paid a reliable dividend since the end of the 19th Century and boasts a high yield of 3.9%.
High-Yield Bank Stocks: Royal Bank of Canada (RY)
Current Dividend Yield: 3.5%
Year-to-Date Return: 11.2%
Over the years, Royal Bank of Canada’s (RY) fortunes have been closely tied to its dominant retail banking segment — first within Canada, then expanding into the bordering Midwest states. That should continue to be a source of significant strength for RY because it is far less vulnerable to fits and starts of Canadian consumers, who are carrying a heavy debt load.
With so much of its business focused on retail, RY has successfully pursued two strategies to boost earnings: focusing on capital markets and targeting U.S. consumers with its retail banking operations. Wall Street expects Royal Bank to report third-quarter earnings per share of $1.56 (CDN) — a 7% boost from the same quarter last year.
Analysts are looking for strong third-quarter profits from Royal Bank’s capital markets group — operations that posted 23% growth in the second quarter. International wealth management is an important growth opportunity for RY, which announced on Wednesday that it had appointed Clive Brown CEO of its Global Asset Management group. Brown is a 21-year veteran of JPMorgan Chase (JPM).
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.