Get 4-5% Dividend Yields from the Big Five Canadian Banks

The Big Five Canadian banks are cheap today. They can become cheaper in this market downturn, but three, in particular, look especially attractive at these prices, including Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) that yields 5.3%.

Along with the market decline, the Big Five Canadian banks have also fallen. The banks, Royal Bank of Canada (TSX:RY)(NYSE:RY), Toronto-Dominion Bank (TSX:TD)(NYSE:TD), Bank of Nova Scotia, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), and Bank of Montreal (TSX:BMO)(NYSE:BMO) have been in business for over a century. The banks are essential to the everyday operations of the Canadian economy, and the banks will be here for a very long time.

So, it’s a good strategy to buy these banks when they’re cheap.

The Big Five Canadian Banks’ Valuations

Comparing each bank’s current multiple to its historical normal multiple, Royal Bank, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce are the best-valued banks at the moment. Indeed, Royal Bank and Bank of Nova Scotia have fallen the most among the group (over 10% in the past year).

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From a valuation perspective, the banks are attractively-priced.

  • Royal Bank is priced at a price-to-earnings ratio (P/E) of 10, while its 10-year normal P/E is 12.6. So, Royal Bank is discounted by 22%.
  • Toronto-Dominion Bank is priced at a P/E of 10.6, while its 10-year normal P/E is 12.4. So, TD is discounted by 15%.
  • Bank of Nova Scotia is priced at a P/E of 9.1, while its 10-year normal P/E is 12.4. So, Scotiabank is discounted by 27%.
  • Bank of Montreal is priced at a P/E of 10.1, while its 10-year normal P/E is 11.7. So, BMO is discounted by 14%.
  • Canadian Imperial Bank of Commerce is priced at a P/E of 8.9, while its 10-year normal P/E is 11.2. So, CIBC is discounted by 19%.

Dividend Yields

The Big Five banks’ dividends are safe. They all have payout ratios of around 50%. The three best-valued banks also have juicy yields:

  • Royal Bank yields 4.7% at $63.40 per share,
  • Bank of Nova Scotia yields 5.3% at $53.30 per share, and
  • Canadian Imperial Bank of Commerce yields 5.4% at $85.80 per share

These yields are much more attractive than the interests offered by GICs or high-interest savings accounts. However, investors should be ready for price volatility. So, they should expect to be invested for at least three to five years.

Dividend Growth

Here are the banks’ dividend growth rates from 2007 to 2015 (an 8-year period). I chose 2007 to be the start year because it was the year before the financial crisis.

Company 2007 Q4 Dividend 2015 Q4 Dividend Dividend Growth Rate
Royal Bank $0.50 $0.79 5.88%
Toronto-Dominion $0.28 $0.51 7.78%
Scotiabank $0.47 $0.70 5.11%
BMO $0.70 $0.82 2%
CIBC $0.87 $1.15 3.55%

Table: Average dividend growth rates from 2007 to 2015

Investors may be deterred from investing in Bank of Montreal and Canadian Imperial Bank of Commerce due to their low dividend growth rates. However, in 2015, their dividend growth rates improved.

BMO’s increased by 5.1%. CIBC was even more impressive; it increased dividends every quarter in 2015 for an annual increase of 11.7%. (Interestingly enough, CIBC’s share price is even 5% cheaper than a year ago.) Comparatively, Royal Bank’s dividend growth rate was 5.3%, Toronto-Dominion’s was 8.5%, and Bank of Nova Scotia’s was 6%.

In Conclusion

I like Royal Bank, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce at these levels. In my opinion, these are good levels to start buying into Royal Bank (a yield of 4.7 to 5%), Bank of Nova Scotia (a yield of 5 to 5.5%), and Canadian Imperial Bank of Commerce (a yield of 5.3 to 5.5%).

Toronto-Dominion is more expensive than the other banks but is warranted given its consistently higher dividend growth history. For Bank of Montreal, its higher multiple is not as warranted.

U.S. Investors

U.S. investors might ignore Canadian dividend stocks because these investors are getting a dividend cut from the foreign exchange. However, when the loonie becomes stronger again, it’ll be the other way around. Additionally, with the strong U.S. dollar, these investors can buy Canadian dividend stocks at a cheaper price.

Canadian Investors

Canadian investors can buy Canadian banks in the non-registered account because eligible Canadian dividends are taxed favorably there. Of course, if you have room in a TFSA, that’s a good option as well.

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Disclosure: At the time of writing, I own RY, TD, and BNS.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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