Which Is the Better Buy in 2018: Canadian Imperial Bank of Commerce or Bank of Montreal?

Which of the two Canadian banks are well positioned to outperform in 2018: Bank of Montreal (TSX:BMO)(NYSE:BMO), or Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM)?

| More on:
The Motley Fool

It was an interesting race to the top when you analyze the stock performances by Canada’s top five banks in 2017.

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), which remained a laggard for much of the year, emerged the top gainer at the time of writing thanks to its stunning performance during the last quarter.

In a slow but steady move, its shares were up more than 10%, trading at $123 and nearing the highest point in the past 12 months. This outcome is what I had expected and extensively written about in my previous columns.  

My point was that short-sellers were wrongly targeting CIBC and won’t be able to achieve their goals. Those who were betting against the CIBC stock were pinning their hopes on the crash of the Canadian housing market. They picked CIBC because of its huge exposure to the Canadian housing market, where prices have surged to a dangerous level.

To their dismay, the red-hot housing markets in Canada’s largest cities, Toronto and Vancouver, didn’t crash and CIBC’s mortgage portfolio remained healthy.

In the fourth quarter, the lender surprised many analysts when its profit surged 25%, boosted by strong performance from its U.S. operations.

In that period, CIBC recorded the first full quarter of input from its Chicago-based PrivateBancorp Inc. The profit from the newly created U.S. commercial-banking and wealth-management division rose more than fourfold to $107 million.

Better buy for 2018?

That was the story of 2017, which leaves investors wondering which Canadian banking stock is best positioned to outperform in 2018.

To answer this question, we should listen to David Berman, an investing columnist at The Globe and Mail, who has an interesting take on picking a winner in the banking space. “Buy last year’s underperforming bank stock. Hold for a year. Repeat,” he wrote in a recent article.

From 2000 until the end of last year, this approach has produced an average annual gain of more than 16% (not including dividends), according to Berman’s research, beating the S&P/TSX Composite Index by about six percentage points over the same period.

I think this strategy makes sense given the oligopoly we have in our financial services industry, where each top lender has its own niche and dominance. This exclusivity provides enough room for each of them to catch up to the market trend within a few quarters.

The bottom line

Next year’s pick is Bank of Montreal (TSX:BMO)(NYSE:BMO), which remained under pressure throughout 2017.

The good thing about investing in Canadian banks over the long term is that they’re great dividend stocks. If you plan to buy-and-hold BMO stock, then you will also be earning a steady income stream while you wait for this stock to catch up in 2018.

With a dividend yield of 3.69%, you’ll be investing in a company that has sent dividend cheques to investors every year since 1829.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Haris Anwar has no position in any stocks mentioned.

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Best Stock to Buy Right Now: Enbridge vs TC Energy?

Enbridge and TC Energy rebounded nicely over the past year. Are more gains on the way?

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

2 Utility Stocks That Are Smart Buys for Canadians in November

Are you looking for some of the smart buys to consider in November? These utility stocks offer growth and a…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is Power Corporation of Canada Stock a Buy for its 5% Dividend Yield?

Is Power Corporation of Canada (TSX:POW) stock's 5% dividend yield worth it? Discover why this resilient stock could be a…

Read more »

hand stacks coins
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These three dividend stocks are ideal for strengthening your portfolio and earning a stable passive income.

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »