Analysts are anxiously awaiting the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking watchdog, to lift payment restrictions on banks at the start of the pandemic in March 2020 to protect against a wave of bank defaults. payment that never happened.
As a result, the big banks have accumulated about $ 21.4 billion in provisions on loans still in good standing, according to a memo released this week by Toronto-based Hamilton Capital Partners.
Hamilton Capital expects banks to increase dividends by as much as 25% once they get the green light, and adds that the increases could be even larger as profits continue to strengthen.
Bank dividends have been a saving grace for investors who need stable income to offset equity risk in their portfolios and provide reliable liquidity in retirement. The flow of fixed income securities has been reduced to a trickle since interest rates were cut following the 2008 global financial crisis.
Guaranteed Investment Certificates (GICs) are currently earning around one percent and government bonds are earning less. With the latest count of inflation exceeding four percent, the situation becomes even more dire.
Large Canadian banks are a staple of the average Canadian investment portfolio, either directly or through Canadian equity mutual funds and exchange traded funds (ETFs). While fees on ETFs are low because funds are passively managed, active managers may be worth the higher fees they charge because they can strategically position holdings to generate higher overall dividends.
Investors can avoid fees altogether (aside from basic trading fees) by buying directly from the big banks or adding to the banks they already own. Here’s some information on Canada’s five biggest banks (numbers are as of early Friday afternoon).
Royal Bank of Canada
Canada’s largest bank is on track for a 3.3% dividend yield this year. Not counting dividends, RBC’s stock is up 84% from the pandemic low and has a sliding price-to-earnings ratio of 12.5 times.
The annual dividend yield for Canada’s most American bank is a little higher at 3.6%. TD stocks are up 80% from the pandemic trough, but, also thanks to strong earnings, their rolling price-to-earnings ratio is 10.4 times below average.
The Bank of Nova Scotia
Outside of Canada, Scotiabank is best known for its focus on Latin America and the Caribbean. Investors should be rewarded with an above average dividend yield of 4.4%. Scotiabank stock is up 75% from its pandemic low, taking its forward price-to-earnings ratio to 11.3 times.
Bank of Montreal
BMO investors are expected to earn an annual dividend yield of 3.3%. Stocks were up 141% from their pandemic low, but those gains were justified by strong earnings. BMO’s forward price-to-earnings ratio is currently 11.7 times.
Canadian Imperial Bank of Commerce
CIBC is offering a 3.9% dividend yield after the bank’s shares rallied 121% from the pandemic low in March 2020. The stock is currently trading at 10.9 times forward earnings.
It is important for income investors to keep in mind that income from stock dividends is not an ideal substitute for fixed income securities. Dividend payments are at the discretion of the company, and the performance of their shares is at the discretion of the open market. Before hitting the buy button, it is always wise to consult with a qualified investment advisor to discuss how banks fit into your overall portfolio strategy.