Is There Ever a Wrong Time to Buy the Top Canadian Banks?

Should you buy Royal Bank of Canada (TSX:RY)(NYSE:RY) now, or is it better to wait?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Royal Bank of Canada (TSX:RY)(NYSE:RY) remains the leading Canadian bank in terms of having the largest market cap. Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), or Scotiabank, takes third place.

The banks outperformed in the long run

Long-term shareholders of these banks have generated excellent total returns while receiving growing dividends. Since fiscal 2000, Royal Bank has delivered an annualized return of about 10.3%. In the same period, Scotiabank has delivered about 9.6% per year on average, while the U.S. market, represented by S&P 500 Index, has had returns of 4.2% per year.

Dividend growth

About 20 years ago, the banks offered yields of less than 3%. Today their yields are closer to 4%. In the period, both Royal Bank and Scotiabank increased their dividends per share by a little more than 10% per year.

Royal Bank’s five-year dividend growth rate is 8.8% compared to Scotiabank’s 6.8%. However, Scotiabank currently offers a bigger yield of about 4.3%, compared to Royal Bank’s yield of roughly 3.7%.

question mark

Was there ever a bad time to buy the banks?

If you had bought Royal Bank or Scotiabank shares right before the financial crisis of 2008/2009, your investments would have delivered about 9.2% per year and about 6.9% per year, respectively.

Scotiabank has underperformed, which is partly due to the stock’s valuation. If you compare the two banks’ valuations to their historical norm, you’ll notice that Scotiabank is more undervalued than Royal Bank.

Some investors point out that if one had waited to buy the banks during the financial crisis, they could have gotten the stocks at huge discounts — and get a big return boost. If one had bought the banks at the bottom during the financial crisis, one would have received annualized returns of about 16% for Royal Bank and 14% for Scotiabank.

However, this is all in hindsight. Sure, there are times when the banks are significantly undervalued, but those opportunities don’t come often. In the long run, it’s time in the market that matters. If you wait for the banks to be super cheap before you buy them, you could be waiting for a long time.

So, there really isn’t a bad time to buy the banks as long as you pay a reasonable multiple for the shares.

Valuation and upside potential

Royal Bank’s and Scotiabank’s normal multiples for the long term are roughly 12.2 and 11.9, respectively. At about $100 per share, Royal Bank trades at a multiple of about 12.3. At about $76 per share, Scotiabank trades at a multiple of about 11.1. So, Scotiabank looks to be more undervalued.

The analysts from Thomson Reuters Corp. seem to agree. They think Royal Bank and Scotiabank have upside potential of about 11% and 15%, respectively.

Investor takeaway

The banks are estimated to grow their earnings per share by about 8% per year for the next three to five years, which could lead to total returns of 11-12%, respectively. So, now is not a bad time to buy either bank. However, keep in mind that a big downturn can happen, at which time investors should sit tight and perhaps even back up the truck on the banks.

Should you invest $1,000 in Maya Gold And Silver Inc. right now?

Before you buy stock in Maya Gold And Silver Inc., consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Maya Gold And Silver Inc. wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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.

Fool contributor Kay Ng owns shares of Bank of Nova Scotia.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

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

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Dip Buyers Could Win Big in Today’s Market Dip

If you want to buy the dip, think long-term. Which is why this TSX stock is a top option.

Read more »