Best Canadian Bank Stocks For March 2024

Dividend Earner

Dividend Earner

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7 min read Affiliate Disclosure

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 of blue-chip stocks. 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 banks 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 with some growth and 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 in 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. Building a winning portfolio also requires stability and a Canadian bank fits nicely to balance risk.

The Business of Canadian Banks

Before you jump in with both feet, know your banks. They are much more than a bank machine from which to withdraw money. Don’t compare their performance to REITs either, it’s apple and oranges.

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

Canadian banks also operate in the insurance business, but it’s small and doesn’t significantly impact the share price.

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

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

Ticker Ticker Company Market Cap P/E Yield Aristocrat Graph SectorID IndustryID
RY TSE:RY Royal Bank 189.66 12.52 4.12 YES 1 7 21
TD TSE:TD TD Bank 143.58 12.83 5.02 YES 1 7 21
BMO TSE:BMO Bank of Montreal 90.12 17.55 4.86 YES 1 7 21
BNS TSE:BNS Scotia Bank 77.75 10.41 6.66 YES 1 7 21
CM TSE:CM CIBC 61.27 10.01 5.51 YES 1 7 21
NA TSE:NA National Bank 37.96 11.81 3.79 YES 1 7 21
CWB TSE:CWB Canadian Western Bank 2.58 8.10 5.09 YES 1 7 22
LB TSE:LB Laurentian Bank 1.13 7.28 7.26 NO 1 7 22

Look at the performance of the big six banks over the past five years. They nearly all beat the TSX in the long run, and you get paid a healthy dividend.

Banks March 2024

What Defines The Best Canadian Bank Stock?

When looking for the top bank stock as an investment, a quantitative and qualitative analysis needs to be done. The quantitative analysis makes it easy to compare the banks side by side, but the qualitative analysis allows you to assess whether 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 banks.

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

What separates the big banks from the smaller banks is wealth management and international exposure. The big banks all offer investment products. On this front, the bigger banks compete with insurance companies 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 two 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, banks generally have good money management. Fees earned tend to follow each other. When one of the banks sneezes, the others tend to sneeze not long after as they pretty much operate the same in Canada. The banking sector is pretty small and many small online banks end up being acquired by the big banks so it’s a quasi-oligopoly.

As such, you end up looking for efficient banks and the ones that succeed 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 good dividend and have regular share buybacks. Royal Bank initiated a 20 million share buyback in February 2019, and TD Bank initiated a share buyback of 30 million shares in October 2020.

As you can see, the shareback helps 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 favour, and once it bounces back, you will profit.

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

Depending on your investment objectives, you could focus on the top bank stocks or the pool of the big six banks through exchange-traded funds (ETFs). Going at it alone 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 individual companies may be daunting for some investors, and if you are looking for income, some ETFs buy the banks and use covered calls to boost the income. A financial ETF like FIE can generate much more income without capital appreciation.

Top 3 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 of whether the stock is out of favour 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. Still, 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 screening stocks for income requires unique dividend data. Not many screeners focus on dividend data and dividend strength. You should consider a screener such as Dividend Snapshot Screeners.

TSE FN SMALL

First National Financial

tse:fn | Financial Services | Mortgage Finance

TSE TD SMALL

TD Bank

tse:td | Financial Services | Banks - Diversified

TSE BNS SMALL

Scotia Bank

tse:bns | Financial Services | Banks - Diversified

Opportunity Score Formula

The top 5 stocks identified above are based on a score calculated using several financial data points from the companies. In the end, the score is generated from the 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 number, over the last 11 years of holding RY, TD, and NA, National Bank has provided me with an extra 2% annual return. In the 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.

There are 11 Canadian banks, with the six major banks being large-cap stocks while the five others are smaller but growing faster in niche markets. If you want a more speculative play with higher growth potential, Equitable Group, or First National Financial are worth considering.