When it comes to high-yield dividend stocks, sometimes it pays to venture outside of your traditional borders. Specifically, the big five Canadian lenders are far more generous than their U.S. counterparts when it comes to dividend yield.
However, that doesn’t make them slam dunks for your equity income portfolio.
True, unlike U.S. banks, Canadian banks are free to hike their dividends — as a couple of them did recently — but their stocks are all deep in the red for the year-to-date. And the reasons for that selloff are likely to pick up.
Canada’s economy is under great pressure from the collapse in oil prices. Western Canada — and Alberta in particular — is getting hammered. At the same time, Canadian household debt relative to disposable income is near all-time highs.
The high debt ratio means that there isn’t much room for these dividend stocks to grow their loan portfolios. More worrisome, high debt and rising unemployment (and a slowing economy) make for a nasty combination.
Canadian banks haven’t seen the follow-through of that combination yet. Loan-losses didn’t do anything spooky in the most recent quarter. Eventually, though, analysts figure it’s got to catch up with them.
That said, the big five Canadian banks recently closed a surprisingly strong second-quarter earnings season. The banks’ diversified business models saved the day, as trading and capital markets activity picked up handsomely. So, with these high-yield dividend stocks all sitting underwater so far this year, maybe it’s time to go bargain hunting.
We’ll look at the big five Canadian bank stocks and see just how much shopping you should be doing.
High-Yield Dividend Stocks: Royal Bank of Canada (RY)
RY Dividend Yield: 4%
A big saving grace for Canadian banks is their exposure to the U.S., where the economy is at least growing (even if it’s merely growing slowly). America certainly helped Royal Bank of Canada (RY) to beat Wall Street’s quarterly earnings forecast.
A shift to doing more business in the U.S. couldn’t have come at a better time, as both mergers and acquisitions and underwriting activities are booming. RBC Capital Markets now derives about 60% of its revenue in the U.S. It’s also Canada’s top underwriter.
Strength in investment banking will serve RBC well through the remainder of the year, but it won’t be enough to drag RBC back above water (it’s off 8% YTD) — not when anxiety is mounting over the direction of the Canadian economy.
High-Yield Dividend Stocks: Toronto-Dominion Bank (TD)
TD Dividend Yield: 3.7%
Strength in capital markets did wonders for Toronto-Dominion Bank (TD), too, helping it beat Street estimates by 3 Canadian cents a share.
Heavy U.S. exposure boosted results beyond capital markets, as almost every business segment posted solid growth. U.S. retail banking grew 2% in the most recent quarter. Wholesale banking grew profits by 19%, while Canadian retail banking improved by 8%.
In other good news, TD boosted its U.S. exposure by buying Nordstrom’s (JWN) credit card business.
But TD stock is down 9% year-to-date despite that fine performance, hampered by mounting expenses and the outlook for the Canadian economy.
That combination of fundamental headwind and negative sentiment should keep TD stock rangebound for some time.
High-Yield Dividend Stocks: Bank of Nova Scotia (BNS)
BNS Dividend Yield: 4.1%
Like its peers, Bank of Nova Scotia (BNS) was able to shrug off lower oil prices and weak Canadian economy in the quarter to beat earnings expectations by 4 Canadian cents a share.
It didn’t do anything for BNS stock, however, which remains down 7% YTD and looks to stay that way. Weaker loan growth — and weaker returns — are clearly on the horizon. Loan losses are also beginning to pick up for BNS. According to Bloomberg, “Revenue increased 4.2 percent to C$6.05 billion from a year earlier, according to Scotiabank, which set aside C$448 million for bad loans, up from C$375 million.”
Underwriting and advisory fees once again came in strong, but that was somewhat offset by a drop in profit from international banking. Unlike its competitors, BNS doesn’t engage in retail banking in the U.S.
High-Yield Dividend Stocks: Bank of Montreal (BMO)
BMO Dividend Yield: 4.3%
Bank of Montreal (BMO) overcame a disappointing quarter in retail banking to beat analysts’ average estimate by 5 Canadian cents a share, and it even raised its dividend by 2 cents.
Trading was strong in the quarter, which boosted capital markets. Wealth management also drove the upside surprise, as did BMO’s U.S. banking business. (BMO does a lot of business in Chicago and the wider Midwest.)
Perhaps even more than other banks, BMO’s outlook for loan growth and loan-losses isn’t all that bright. Shares are down a sector-worst 13% YTD.
As tempting as the 4.3% yield on the dividend might be, don’t expect any price appreciation to contribute to returns. If anything, the risk is for more downside.
After all, there’s nothing special about BMO to let it buck the sector trend.
High-Yield Dividend Stocks: Canadian Imperial Bank of Commerce (CM)
CM Dividend Yield: 4.4%
Heavy exposure to capital markets in the form of trading, underwriting and advisory fees helped Canadian Imperial Bank of Commerce (NYSE:CM) beat Street estimates by 5 Canadian cents per share, but the other areas also showed strength.
Indeed, CM enjoyed gains across every business. Retail and corporate banking, wealth management and wholesale banking saw operating earnings rise anywhere from 7% to 17%.
In a smart move, the bank is actually doubling down on wealth management.
CM recently hiked its payout, but — like BMO — the yield is high because the stock is down. Indeed, shares are off roughly 12% YTD.
Some forecasts have the Canadian economy logging its lowest growth rate outside of recession in 30 years. That will only add further pressure to CM stock — and the rest of the sector — for a while.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.