Best Canadian Bank Stocks For November 2023

Canadian investors have one thing in common: Canadian Bank Stocks. If you ask any Canadian dividend investor, you will find at least one bank in their portfolio. Most of the time, investors will start with the best of the best bank stocks but go on to add one or two more financial institutions to their portfolio

For many Canadians, a core holding from the financial sector will usually be one of the largest bank in Canada. It happens to be what I also suggest for a beginner portfolio. If you hold ETFs, chances are the banks are some of the largest holdings within the ETF and more so with a Canadian dividend ETF as it’s heavy with financial stocks.

It’s an investment that will provide stock investors some growth with a decent dividend yield while limiting the downside. It’s a great way to start investing and to secure income when interest rates are low. If, or when, interest rates go up, the banks also profit for a win-win situation.

The major banks are Canadian Dividend Aristocrat (5+ years of dividend increases) and if it was not for the change in financial requirements back in 2009, they probably would have made it to the Canadian Dividend Achiever list with 10 years of dividend increases.

The S&P had to adjust the rules for a Canadian Dividend Aristocrat qualification as losing the large banks back in 2009 would have had a major impact on the ETFs tracking the aristocrats.

Read on for details on picking a bank stock but the best Canadian bank stock this year is National Bank and the safest banks to hold are TD Bank and Royal Bank.

The Business of Canadian Banks

Before you jump in with both feet, know your banks. They are much more than a bank machine to withdraw money from.

The largest banks in Canada deal with retail banking (a.k.a. financial services), commercial banking, financial products, credit cards, mortgages (both personal and commercial), investment services and wealth management. In general, their earnings is often broken down by those categories along with countries.

Canadian banks also operate in the insurance business but it’s small and doesn’t have much of an impact on the share price.

While the Canadian banking industry isn’t regulating on banking fees as you have the choice of no-fee accounts with various financial institutions, the fees are like a monthly subscription and they go up.

Comparing the Canadian Bank Stocks

Here is a list of the contenders that pay a dividend. The list is sorted by market capitalization as a starting point.

Which of the banks is considered the best bank to invest in Canada? Well, it’s not just one bank as it can depend on their price when you are ready to invest. The big major banks sort of have an oligopoly on the Canadian market. The major banks pretty much all bought one of the new digital banks over time, but letting them operate as is.

Have a look at the performance of the big 6 banks over the past 5 year. They nearly all beat the TSX in the long run and you get paid a healthy dividend.

What Defines The Best Canadian Bank Stock?

When looking for the top bank stock as an investment, there is a quantitative and a qualitative analysis that needs to be done. The quantitative makes it easy to compare the banks side by side but the qualitative is where you can assess if the choices made by the CEO and the management teams are the right ones for growth.

When you look at the basics, they all perform the same business with similar fee models. That includes the big banks with international presence along with the regional bank.

The competition is for your banking, mortgage, loans and credit card business. Similarly, there are business loan competition which, in many cases, require larger banks.

What separates the big banks from the smaller banks is the wealth management and international exposure. The big banks all offer their own investment products. The bigger banks compete with insurance companies on this front and independent asset management firms.

The last growth prospect the large banks have forayed into is for an international presence and growth in customers.

When you look at the big banks, there are 2 questions you want to ask from a qualitative perspective.

• Is the bank operation efficient?
• Is the growth plan something you believe in?

What to look for in a Canadian Bank

Fiscally, the banks generally have good money management. Fees earned tend to follow each other. When one of the bank sneezes, the others tend to sneeze not long after as they pretty much operate the same in Canada. The banking sector is actually pretty small and many small online banks endup being acquired by the big banks so it’s a quasi-oligopoly.

As such, you end up looking for the efficient bank and the ones that succeeds in placing their growth bet. To that end, I focus on dividend growth within the top 6 banks and I use the Chowder Score to decide on the best one to hold.

Canadian Bank Stocks Are Shareholder Friendly

The banks pay a really good dividend and have regular share buybacks. Royal Bank initiated a 20 million share buyback on February 2019 and TD Bank initiated a share buyback of 30 million shares on October 2020.

As you can see, the sharebuy back help with the stock value and the dividends put money back in your pocket.

Canadian Banks Investing Strategy

There is a theory that you just buy the highest yielding bank as it implies it’s out of favor and once it bounces back you will profit.

For safety reason, it’s recommended that you follow this strategy with the big banks only if this is appealing to you.

Depending on your investment objectives, you could focus on the top bank stocks or the pool of the big 6 banks through exchange-traded funds (ETFs). Going at it on your own will save on MER but if you have small amounts of money, you can buy ETFs for free.

Financial ETFs for Canadian Bank Stocks

Buying the individual companies may be daunting for some investors and if you are just looking for income, some ETFs buy the banks and also use covered calls to boost the income. A financial ETF like FIE can give you a lot more income but without capital appreciation.

Top 6 Canadian Bank Stocks

Can you rely on the stock price within the 52-week range to buy a bank stock? The answer is no. The banks don’t tend to play within a range like that. Instead the PE is a bit more of an indicator or whether the stock is out of favor or not.

Institutional investors also hold a large majority of the shares of the big banks highlighting the big banks common holdings of many investors through various products but you should not expect to hit a home run in terms of return.

Scotia Bank is in the dog house. It could be a play due to being down, but it might go sideways for years …

Note that to screen stocks for income require unique dividend data. Not many screeners focus on dividend data and dividend stength. You should consider a screener such as Dividend Snaspshot Screeners.

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1. National Bank

With an experience of more than 150 years, National Bank is one of the six largest commercial banks in Canada. The bank enjoys leading market share in Quebec which accounts for 58% of its total revenues.

The bank also has a presence in international markets like the US, Europe and other countries. National Bank’s operating units include personal and commercial banking accounting for more than 40% of its income, followed by financial markets (29%), wealth management (20%), and US specialty finance and international (9%).

National Bank offers a wide spectrum of banking and financial products and services, including corporate and investment banking, securities brokerage, insurance, wealth and retirement management. National Bank’s personal and commercial banking segment has a strong presence in central Canada.

Key Investment Data

2. Scotia Bank

Key Investment Data

3. TD Bank

Toronto Dominion Bank is a leading Canadian bank providing banking products and services in Canada and the US. It is the fifth largest bank in North America by total assets. The bank was formed as a result of amalgamation of The Bank of Toronto and The Dominion Bank in 1955. Retail earnings accounts for more than 90% of TD Bank’s total earnings.

The bank operates through three business segments: Canadian retail banking (53% of latest income), U.S. retail banking (47%) and wholesale banking. TD Bank offers a wide range of retail, small business and commercial banking products and services to more than 25 million customers worldwide and almost 13 million digital customers.

Toronto Dominion bank operates through more than 1,250 locations along the Northeast, Mid-Atlantic, Metro DC, the Carolinas and Florida. It enjoys #1 or #2 market share positions for most of its retail products in Canada. The bank operates in four of the top ten metropolitan areas and seven of the ten wealthiest states in the U.S.

Key Investment Data

Opportunity Score Formula

The top 5 stocks identified above are based on a score calculated using a number of financial data points from the companies. In the end, the score is generated from following five key indicators:

• 52-Week Range: Trend over the past 52 weeks. Is the stock pulling back from a 52 week high?
• P/E Ratio: Is the stock price running away from its earnings?
• Revenue Growth: Is the revenue growing? Growing revenue is important. We don't want to be fooled by share buybacks and cost management only.
• Dividend Yield: Is the yield attractive? Usually could identify a pullback if the yield starts to go up or major trouble if it goes too high.
• Dividend Growth: Uses dividend growth and the Chowder Rule. Is the company capable of growing the dividend consistently?
• Dividend Payout Ratio: Uses historical averages to put today's ratio in perspective. Is the company able to grow the dividend at the same rate it increases its earnings?

The generated score is meant to assess an entry point opportunity based on historical and today's numbers. It completely ignores the business quality, the quality of the company is for every investor to assess. My stock selection process breaks down the quantitative and qualitative assessments investors should establish to pull the trigger before buying.

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While the above list is quantitative based on today’s numer, over the last 11 years of holding RY, TD, and NA, National Bank has provided me with an extra 2% annual return. Long term, it’s the better of all the major banks. It’s a core holding for me and I have almost 5% of my portfolio in it.

There is a total of 12 Canadian banks with the 6 major banks being large cap stocks while the 6 others are smaller but growing faster in niche market. If you want a more speculative play with higher growth potential, Equitable Group, or First National Financial are worth considering.