When it comes to Canadian bank stocks, there are a lot of similarities going beyond the core business model and international reach (as most of them have a sizable presence in the US). The similarities are primarily rooted in their dividend-based return potential. All big six Canadian banks are dividend aristocrats with stellar histories.
The actual dividend histories stretch back to decades, even a century, of consistent dividends, but the history of dividend growth is relatively recent (starting after the Great Recession). Most banks offer a generous yield and grow their dividends at a very similar pace.
The most significant difference comes from the capital appreciation potential of bank stocks, and this is where National Bank of Canada (TSX:NA) comes in. If we consider the overall return potential the most significant metric, it’s objectively the best banking stock in Canada you can invest $1,000 in.
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The overall return potential
The National Bank of Canada stock has been the best and one of the most consistent growers in the banking sector, and its capital appreciation in the last decade has exceeded the others by a significant margin. It rose by around 152% in the previous decades and about 95% in the last five years, almost doubling its investors’ capital in half a decade.
The closest bank stock in both timeframes (5-year and 10-year) is Royal Bank of Canada, the leader of the TSX by market cap. It grew by about 107% in the last 10 years and 57% in the last 5. This margin is present in the overall returns as well. The National Bank of Canada stock returned 282% to its investors if you also count the dividends. It essentially tripled its investors’ capital in just one decade.
Investors may even enhance this return potential and impact by reinvesting the dividends into the bank.
Fundamental strengths and dividends
The bank shares many fundamental strengths with other major Canadian banks – including a conservative approach to business, resilience against weak markets, and healthy financials. Right now, it’s among the more modestly valued Canadian banks if we evaluate based on the p/e ratio, which is impressive considering how rapidly the bank has grown recently.
The dividends share a lot of similarities as well, with the only exception being the yield. It’s the least generous Canadian bank in this regard but that’s a direct consequence of its growth. The yield is still quite decent at 3.4%. Other things, like the safe payout ratio and healthy dividend growth rate are quite similar to other banks.
Foolish takeaway
The overall return potential, coupled with its attractive valuation, makes the National Bank of Canada the best stock in the Canadian banking sector. Assuming it sustains its return potential in the next decade and you invest $1,000 right now, you can expect it to grow to about $3,800 over that period.
