The Growing Power of Dividends

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Topic: Dividend Stocks

The Big Five: The best bank stocks for dividends

best bank stocks for dividends

We’ve long recommended that most 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. Simply put, they are some of the best stocks for dividends

Banks remain key lower-risk investments for a portfolio. Top quality dividend stocks, including dividend paying ETFs (Canada) are a key part of a successful strategy. The Big Five Canadian banks are some of the best bank stocks for dividends because they all have long histories of annual dividend increases. That history helps answer the question, which are the best bank stocks for dividends? By extension, it also helps to answer which are the best dividend paying ETFs (Canada).

We believe each of the Big Five is still well-positioned to weather downturns in the Canadian economy, These bank stocks trade at attractive multiples to earnings and continue to raise their dividends.

The Growing Power of Dividends

Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor.

The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.

 I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

In the wake of the 2008 financial crisis, for example, banking regulators around the world have come up with new regulations that would help avoid another crisis. The new rules forced banks to increase their capital reserves, which have helped them better absorb future loan losses.

However, Canada’s banks were already in much better shape than banks in other countries.

The Canadian bank stocks have long histories of annual dividend increases—and their strong profitability should let them keep raising their dividends. The same applies to top dividend paying ETFs (Canada) that hold these stocks.

Best bank stocks for dividends: Dividends are a big part of long-term investment gains

We think that Canadian dividend stocks, including quality dividend paying ETFs (Canada), rarely get the respect they deserve from investors. But with today’s low-interest rates, driven lower by the pandemic, savvy investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price). Dividend-paying companies are responding by doing their best to maintain, or even increase, their payouts.

If you stick with top-quality stocks with high dividends, the income you earn can supply a significant percentage of your total return. As we mentioned above, that can be as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

To summarize then, when it comes to investment safety, a long history of steady dividends is in some ways more important than a current high dividend yield.

The best bank stocks for dividends will also give you a dividend tax credit

Canadian taxpayers who hold Canadian dividend stocks, or dividend paying ETFs (Canada), get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

If dividends are your focus, then don’t limit your investing to only bank stocks

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’re 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. The same can be achieved with quality dividend paying ETFs (Canada).

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 Resource stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

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.

How many Canadian bank stocks do you hold in your portfolio? Do you agree these are the best bank stocks for dividends?

This article was originally published in April 2021 and is regularly updated.

Comments

  • Valued 

    I hold the same stocks, you hols, BNS, CM, RY, TD. Why don’t you buy/hold BMO and NA ????
    Thank you
    Leslie Dobos

    • TSI Research 

      We still see all of the big-five banks—TD Bank, CIBC, Bank of Montreal, Royal Bank and Scotiabank as buys. National Bank is an attractive hold.

  • H.b. Lucille 

    I HOLD ALL THE BANK STOCKS THE BMO RY TD ARE MY LARGEST,TELL which of the pipelines are the best and safest dividend payers Thanks in advance John

    • TSI Research 

      We continue to advise our subscribers to hold at least one or two of Canada’s Big Five banks and we believe each is still well-positioned to weather downturns in the Canadian economy. All trade at attractive multiples to their earnings and continue to raise their dividends despite the slower growth and high loan-loss provisions of this current period of high inflation.

  • Ronald 

    National Bank is not too shabby either. Before the dividend freeze National raised it’s dividend twice a year.

  • Richard 

    I have held BNS, TD and RY for at least 15 years. I am disappointed at the performance of BNS even though it offers the highest dividend amongst the three. On the US side, I hold Visa and happy with that stock. My Utilities complete the dividend portion of my portfolio as I stay diversified across the five main sectors as recommended by Pat and his team.

  • Since all the Big Five are recommended, I chose the one that has the lowest investment in fossil fuels (CIBC). If you care about the climate crisis, you might consider this. Currently, they are, from best to worse: CIBC, BMO, TD, BNS, and RBC (annual Banking on Climate Chaos report). RBC is significantly worse than the others.

    • TSI Research 

      Thanks for your comment. We take a wide range of factors into consideration when coming up with our stock recommendations — including a company’s ESG (environmental, social, and governance) efforts, which includes a climate component.

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