Dividends: Look Due North

I am frequently asked, when I post about my love affair with Canadian Bank Stocks, which ones are the best. Truth be told, there is some merit in the adage that one should purchase the major Canadian bank stock that has the highest dividend yield at the time of the investment.

Of course, I would not suggest that this be your only measure but the past dictates that you wouldn’t have gone too far wrong if it was.

I have often said that Scotiabank (BNS) was my favorite of the Canadian bank stocks. I would also suggest that dividend growth investors take a look at Bank of Montreal (BMO) due to its current valuation and yield.

Let’s have a quick look at some recent information on these two investments.

Bank of Nova Scotia (BNS)

BNS reported Q3 results that were slightly ahead of expectations, with EPS of $1.03 vs. consensus of $1.00. The upside was primarily due to stronger-than-expected domestic retail revenues, although securities gains also contributed. BNS’ domestic banking division led the way in terms of core net income growth. Analysts have increased its price target from $54.00 to $55.00 based on 2007 and 2008 EPS estimates that have guided higher.

There still remains some concern that Canadian banks could trade sideways or down in the near term on negative news flow out of world financials and potential earnings disappointments to finish out the year. However, Scotia holds the most excess capital and has above-average medium and long-term growth prospects due to its presence in Latin America and the Caribbean which I have mentioned before, was a spectacular strategic move.

Bank of Montreal (BMO)

BMO reported core cash EPS of $1.46, ahead of the consensus estimate of $1.39. The upside was primarily due to strong growth in capital markets and in the private client division. The bank continues to reduce the size of the commodities portfolio and its risk, however some analysts estimate that there are approximately 2 quarters to go before the size of the portfolio is reduced to an acceptable level.

BMO just raised its dividend by $0.02 to $0.70 per share which makes that juicy 4.0% yield look a whole lot sweeter!

Some analysts believe that BMO is likely to underperform its Canadian Bank peers as its retail revenue continues to lag the group and the bank derives a higher proportion of its earnings from wholesale banking.

BMO is worth a look due to its consistent dividend growth, attractive current yield, and the fact that it is a Canadian banks that’s moat is government protected. Some have voiced concern over the higher than average dividend payout ratio, which is a valid concern. All in all, BMO is certainly worth a look for the dividend growth investor!

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