The Big Five Canadian banks have paid dividends for over a century! They are great investments for any long-term portfolio. If you’re looking for current income, they’re a good fit, yielding 4-4.5%. If you’re looking for income growth that beats inflation to maintain your purchasing power, some of the banks have dividend growth of 8-12% a year.
Didn’t Warren Buffett say to buy great businesses at fair prices? Well, what’s more to like about the banks is that some are priced at discounts of over 13% today.
Royal Bank of Canada (TSX:RY)(NYSE:RY) costs $73.6 per share and yields 4.3%. For the past three years, Royal Bank has increased its dividend at a compound annual growth rate (CAGR) of 10.9%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $136 by now, a 36% increase in income.
With a payout ratio of 48%, Royal Bank’s projected annual payout of $3.16 per share is safe. The bank currently trades at a price-to-earnings ratio (P/E) of 11.2, and it normally trades at a P/E of 12.8. This means the shares trade at a fair price of $85 and are currently discounted by 13.4%.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) costs $52.9 per share and yields 3.9%. For the past three years, Toronto-Dominion Bank has increased its dividend at a CAGR of 12.1%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $140 by now, a 40% increase in income.
With a payout ratio of 49%, Toronto-Dominion Bank’s projected annual payout of $2.04 per share is safe. The bank currently trades at a P/E of 11.4, and it normally trades at a P/E of 12.6. This means the shares trade at a fair price of $58 and are currently discounted by 8.8%.
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) costs $60.4 per share and yields 4.6%. For the past three years, Bank of Nova Scotia has increased its dividend at a CAGR of 7.7%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $125 by now, a 25% increase in income.
With a payout ratio of 53%, Bank of Nova Scotia’s projected annual payout of $2.80 per share is safe. The bank currently trades at a P/E of 10.5, and it normally trades at a P/E of 12.8. This means the shares trade at a fair price of $72.8 and are currently discounted by 17%.
Bank of Montreal (TSX:BMO)(NYSE:BMO) costs $75.4 per share and yields 4.4%. For the past three years, Bank of Montreal has increased its dividend at a CAGR of 3.2%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $110 by now, a 10% increase in income.
With a payout ratio of 52%, Bank of Montreal’s projected annual payout of $3.28 per share is safe. The bank currently trades at a P/E of 11, and it normally trades at a P/E of 11.9. This means the shares trade at a fair price of $81.7 and are currently discounted by 7.7%.
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) costs $98.9 per share and yields 4.5%. For the past three years, Canadian Imperial Bank of Commerce has increased its dividend at a CAGR of 4.2%. So, if you’d received $100 worth of dividends from it three years ago, you would have received $113 by now, a 13% increase in income.
With a payout ratio of 50%, Canadian Imperial Bank of Commerce’s projected annual payout of $4.48 per share is safe. The bank currently trades at a P/E of 10.5, and it normally trades at a P/E of 11.4. This means the shares trade at a fair price of $108.1, and are currently discounted by 8.5%.
In Conclusion
It’s true the Big Five banks froze their dividends during the financial crisis. However, all of the banks have grown dividends for four years in a row now, except for Bank of Montreal, which has increased it for only three years in a row.
Royal Bank of Canada and Bank of Nova Scotia are priced at a discount of over 13%, or have a margin of safety of over 13% based on their normal historical multiples. On the other hand, in the past three years Royal Bank and Toronto-Dominion Bank have provided the highest income growth. Because of the above reasons, these three banks are the best choices of the five for long-term income and growth.
