Tag Archives: TSX:BMO

Benefit from Rising Interest Rates with the Big 5 Canadian Banks

This is a guest contribution by Nick McCullum of Sure Dividend. Sure Dividend uses The 8 Rules of Dividend Investing to identify high-quality dividend stocks suitable for long-term investment.

The Big 5 Canadian banks offer great dividends and the stocks look poised for steady long-term growth if interest rates continue to go higher.

This article will discuss:

  • why we think interest rates in North America are going higher,
  • 5 actionable investment ideas that allow investors to benefit from rising interest rates, and
  • why the banks will benefit from rising interest rates

Interest Rates Are Heading Higher

In both Canada and the United States, the trend is clear: interest rates are on their way up after a prolonged period at near-zero benchmark rates.

In July, the Bank of Canada raised its benchmark interest for the first time since 2010. While the bank did not communicate any concrete plans for future rate hikes, it is likely that more are coming.

Graph of Bank of Canada Overnight Money Market Financing Rate from 1975-2017

Source: YCharts

In the United States, the trend is even more clear.

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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).

tax-free savings account image

Photo Credit: kenteegardin from SeniorLiving.org via Compfight cc

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%.

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