Canadian bank stocks are true blue chip stocks and have long been a top choice for growth and income–today’s economic uncertainty doesn’t change that

We’ve long recommended that all Canadian investors own two or more of the Big Five Canadian bank stocks — Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s mainly because of the importance of these institutions, and their blue chip stocks, to Canada’s economy. That hasn’t changed despite lingering economic uncertainty about high inflation.

Canadian bank stocks–unlike Canadian penny stocks–remain key lower-risk investments for a portfolio. As well, the Big Five Canadian bank stocks all have long histories of annual dividend increases. That makes them top bluc chip stocks for income investors.

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Picking between two of Canada’s big banks is a lot harder choice than choosing between a bank stock and a Canadian penny stock. Still, if you’ve decided to start by investing in just one Canadian bank, one key question remains: which Canadian bank is best to invest in today? How can you tell which bank will give you the best long-term performance? There are a few performance clues you can look out for.

When deciding which Canadian bank to buy, you want to start with the same criteria you would use for any investment in blue chip stocks (as well as with a Canadian penny stock):

We believe Canadian bank stocks are still well-positioned to weather downturns in the Canadian economy, despite their significant increases in loan-loss provisions in 2020 in anticipation of a spike in bad loans. Those fears have eased and they’ve now lowered their provisions. All five stocks trade at attractive multiples to earnings.

Canadian bank stocks have always been some of the best income-producing securities–true blue chip stocks. Below are 3 tips for using dividends as barometer for picking Canadian bank stocks.

1. Dividends are a sign of investment quality. It’s why so few Canadian penny stocks offer them. While some good banks reinvest a major part of their profits instead of paying dividends, failing banks hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst banks.

2. Dividends can grow. Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But banks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That also gives you a hedge against inflation.

For a true measure of stability, focus on banks that have maintained or raised their dividends during economic and stock market downturns. These banks leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth. Canadian banks stocks are well known for their financial stability in the face of economic downturns.

3. Look for Canadian bank stocks with consistent dividends. One of the best ways of picking a quality stock is to look for banks that have been paying dividends for at least 5 to 10 years. Dividends are cash outlays that an unsuccessful bank could never produce. A history of dividend payments is one trait that all the best dividend stocks have.

Don’t limit your investing to bank stocks.

Simply put, a well-constructed stock portfolio will make your life easier and maximize your gains.

Early in their investing careers, many investors have only a vague idea of the value of a planned portfolio when investing in the stock market.

When you try to pick a handful of stocks that will all beat the market, you are asking a lot of yourself. No one, not even people that devote their entire lives to it, has ever been able to consistently pick stock-market winners over long periods, even when limiting themselves to so-called blue chip stocks.

On the other hand, it’s relatively easy to acquire a balanced, diversified portfolio of mainly high-quality dividend paying stocks, spread out across most if not all of the five main economic sectors: Resources & Commodities, Finance, Manufacturing & Industry, Utilities, and Consumer.

If you diversify (which could include a quality Canadian penny stock), you improve your chances of making money over long periods, no matter what happens in the market.

For example, Manufacturing stocks may suffer if raw-material prices rise, but in that case, your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

If borrowers can’t pay back their loans, your Finance stocks will suffer. But high default rates usually lead to lower interest rates, which push up the value of your Utilities stocks.

Spreading your holdings out across the five sectors helps you avoid overloading yourself with stocks that are about to slump because of industry conditions or a change in investor fashion. By diversifying across the sectors, you increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

These stocks come along every year. By nature, their appearance is unpredictable: if you could routinely spot them ahead of time, you’d quickly acquire a large proportion of all the money in the world, and nobody ever does that.

Have you invested in Canadian bank stocks in the past? Do you currently hold Canadian bank stocks in your portfolio? Share your thoughts and experiences with us?

This article was originally published in 2011 and is regularly updated.