How to decide which Canadian bank stocks are best for you

Canadian Bank Stocks

Canadian bank stocks have long been one of our top choices for growth and income

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 their importance to Canada’s economy. That hasn’t changed for 2018 despite concerns about the possibility of a pullback in mortgage demand and the early state of recovery for the country’s oil and gas industry.

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Banks remain key lower-risk investments for a portfolio. As well, the big five Canadian bank stocks all have long histories of annual dividend increases.

If you’ve decided to start by investing in just one Canadian bank, the 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 in any investment:

We believe Canadian bank stocks are still well positioned to weather downturns in the Canadian economy, contrary to pessimistic forecasts on the banks’ prospects from some in the business media. They trade at attractive multiples to earnings and continue to raise their dividends.

Toronto-Dominion remains one of our top picks among Canada’s big five banks due in part to its U.S. business. Here’s more, along witht he most-recent financial results:

TORONTO-DOMINION BANK $64 (Toronto symbol TD; Conservative Growth and Income Portfolios, Finance sector; Shares outstanding: 1.9 billion; Market cap: $121.6 billion; Price-to-sales ratio: 3.8; Dividend yield: 3.4%; TSINetwork Rating: Above Average; earned $2.6 billion in its fiscal 2017 second quarter, ended April 30, 2017. That’s a 12.2% increase over $2.3 billion a year earlier. Due to more shares outstanding, per-share earnings rose at a slower pace of 11.7%, to $1.34 from $1.20.

Earnings from Canadian banking operations (64% of the total) improved 7.2%. The bank benefitted from higher loan demand, lower insurance claims, higher fee-based income and growth at its wealth management operations. Profits from U.S. banking (26%) rose 18.4% thanks to stronger consumer and business demand for new loans. Earnings from wholesale banking (10%) gained 13.2% on higher trading volumes and lower loan-loss provisions.

Overall revenue in the quarter rose 2.6%, to $8.5 billion from $8.3 billion a year earlier. TD also set aside $500 million to cover potential loan losses, down 14.4% from $584 million. That drop is mainly because the year-earlier quarter contained extra provisions for loans to clients in the oil and gas industry.

The bank has now finished its own investigation into allegations it pressured employees to meet sales targets using unethical practices. Those allegations include increasing lines of credit and credit card limits without customers’ knowledge. TD has concluded that any problems were limited to a small group of employees. Even so, it will strengthen its internal controls to detect and prevent abuses.

The stock trades at 12.0 times the bank’s projected 2017 earnings of $5.32 a share. The $2.40 dividend yields 3.8%.

TD is our #1 Conservative buy for 2017. We’ll announce the 2018 pick in January 2018.

Canadian bank stocks pay some of the best dividends

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

1. Dividends are a sign of investment quality. Some good banks reinvest a major part of their profits instead of paying dividends. But 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.

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, 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.


  • I read that the Muskrat Falls project in Labrador was in serious financial trouble. And that tjhe building of the underwater cable from Newfoundland to Nova Scotia might not be built due to large cost overruns. Could this have a significant impact on Fortis and Emera?

  • Vernon

    Thanks for the advice. My two cents worth is that you should buy stock in the big bank that your personally use. That way you can get a good sense of how its business is going and expanding or contracting.

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