Best Canadian Bank Stocks – October 2020

Canadian investors have one thing in common: Canadian Bank Stocks. If you ask any Canadian dividend investor, you will find at least one bank. For many, it’s a core holding and it’s also what I 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 dividend ETF.

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.

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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.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYieldYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:RYRYRoyal BankFinancial ServicesBanks - Diversified0.6996.29104.3112.3812.387.780.044.490.555344.320.118567Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.7260.5383.5511.7311.735.160.055.220.612443.160.142367Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.6857.1852.7310.1110.115.660.066.300.636043.600.122468Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.6684.0941.1812.0812.086.960.055.040.609244.240.088357Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.71102.5034.7411.9211.928.600.065.700.679145.840.105767Tollbooth - UnregulatedNONOYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6967.0322.5211.1611.166.010.044.240.472542.840.111067Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.6926.392.309.119.112.900.044.400.400041.160.098977Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.5127.201.1710.9910.992.470.065.880.647841.600.094325Tollbooth - UnregulatedNONONONOCanada1

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

Dividend Adjusted Chart by StockRover.

Best Canadian Bank Stocks

When looking for a bank 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?

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What I 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.

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 this past October.

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. See the table sorted by highest yield.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.6857.1852.7310.1110.115.660.066.300.636043.600.122468Tollbooth - UnregulatedNONOYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.5127.201.1710.9910.992.470.065.880.647841.600.094325Tollbooth - UnregulatedNONONONOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.71102.5034.7411.9211.928.600.065.700.679145.840.105767Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.7260.5383.5511.7311.735.160.055.220.612443.160.142367Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.6684.0941.1812.0812.086.960.055.040.609244.240.088357Tollbooth - UnregulatedNONOYESNOCanada1
TSE:RYRYRoyal BankFinancial ServicesBanks - Diversified0.6996.29104.3112.3812.387.780.044.490.555344.320.118567Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.6926.392.309.119.112.900.044.400.400041.160.098977Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6967.0322.5211.1611.166.010.044.240.472542.840.111067Tollbooth - UnregulatedNONOYESNOCanada1

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.

Get your list of STRONG Dividend Growth Stocks

Top 6 Canadian Bank Stocks

Going by the Dividend Snapshot Opportunity Scorea pure quantitative approach – the following are the top Canadian bank stocks. When the score is within a 5 to 10 point range, that’s when you really need to review the qualitative aspect of the bank.

#1 – Scotia Bank

BNS - SmallScotiabank is a leading international bank in Canada and a leading financial services provider in the Americas. The bank has a presence in personal and commercial, corporate and investment banking, wealth management and capital markets, and serves 25 million customers worldwide. With a rich history of 185 years, the bank has developed an extensive network of over 960 branches and more than 3,600 automated banking machines in Canada, and 1,800 international branches. Scotiabank has a wide geographic presence in attractive markets in Latin America (71% of revenues), Caribbean & Central America (25%) and Asia (4%). It operates through Canadian banking (49% of earnings), international banking (36%) and global banking and markets (15%) business lines. Scotiabank is highly diversified by products, customers and geographies, which reduces risk and volatility. The bank generates nearly 80% of its earnings from high quality and stable businesses which gives stability to cash flows.

Investment Data

#2 – CIBC

CIBC or Canadian Imperial Bank of Commerce is a leading North American financial institution, formed as a result of the merger between the Canadian Bank of Commerce and the Imperial Bank of Canada in 1961. The bank operates through its four strategic business units Canadian Personal and Small Business Banking (48% of latest net income), Canadian Commercial Banking and Wealth Management (24%), U.S. Commercial Banking and Wealth Management (13%), and Capital Markets (15%). The bank caters to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. CIBC has a strong client focused culture and operational efficiencies which drive shareholder value and aid growth across different platforms. CIBC’s investment in technology and digital platforms should also meet the evolving needs of its clients. The bank caters to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world.

Investment Data

#3 – TD Bank

TD - SmallToronto 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.

Investment Data

#4 – Royal Bank

RY - Royal BankRoyal Bank is a diversified financial services company offering personal and commercial banking, wealth management, insurance, investor services, and capital markets products and services. It is one of Canada's largest banks. Royal Bank also ranks amongst the largest banks in the world based on market capitalization. It serves 16 million clients in Canada, the U.S., and 34 other countries. By geography, Canada is its largest market accounting for 61% of revenues, followed by the US (23%) and other countries (16%). Royal Bank has a large set of diversified customers ranging from corporate and institutional to high net worth clients. The bank has five business segments - personal & commercial banking (49% of earnings), capital markets (21%), wealth management (18%), insurance (7%) and investor & treasury services (5%). It maintains a good balance of assets having nearly 50% retail and 50% institutional assets. Royal Bank operates through the largest financial distribution and branch network in Canada along with leading client franchises.
Investment Data

#5 – National Bank

NA - National BankNational 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. With an experience of more than 150 years, National Bank is known for its client focused integrated financial services and its strong brand name.The bank is deploying new digital services and automated operations to improve client satisfaction and increase efficiency.

Investment Data

#6 – Bank of Montreal

BMO - Bank of MontrealBank of Montreal is the eighth largest bank in North America by assets. It provides diversified financial services and products in personal and commercial banking, wealth management and investment banking segments, to a wide range of customers including more than 12 million individuals, businesses, governments and corporate customers across Canada and the U.S. By geography, Canada is its largest market accounting for over 60% of net income, followed by the US (28%) and other countries (9%) like Europe, Asia, the Middle East and South America. The bank has a strong presence across regional economies and markets around the world and is in a good position to address the growing cross border needs of corporate customers. It owns a network of more than 900 branches and ATMs and operates through Canadian Personal and Commercial Banking (41% of net income), U.S. P&C (23%), BMO Wealth Management (18%) and BMO Capital Markets (18%) operating groups.

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.

If you are interested in more details, the Canadian Dividend Screener provides many more data points to help make your investment decision.

Dividend growth investing works and you can generate a healthy retirement income but you have to buy individual stocks. If you are not comfortable with holding individual stocks, you can always buy dividend ETFs or consider different passive income ideas to generate a retirement income.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.