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Best Canadian Bank Stocks: Where to Invest in Canadian Financial Services in 2021

Best Canadian Bank Stocks: Where to Invest in Canadian Financial Services in 2021

When it comes to the stock market, there are no guarantees. But Canadian banks are about as close as it gets. They’ve led the way for years, generating huge profits, stable earnings growth, and consistent dividend payouts. But with several banks to choose from, Canadian investors might be wondering which is the best Canadian bank stock to buy. Our list of the best Canadian bank stocks will help you decide.

Who Are Canadian Bank Stocks Best Suited For?

Canadian bank stocks appeal to a broad spectrum of investors, for good reason. Not only are the banks highly capitalized, but they benefit from stable earnings growth and are protected from outside competition by the Canadian government. In other words, they are the epitome of low-risk, blue-chip stocks. It seems as though Canadian banks can make money in any economic environment.

Bank stocks are a great place to start if you’re new to stock market investing due to their predictable nature. Dividend-focused investors love bank stocks because of their long history of paying dividends. BMO, for example, has the longest dividend track record, having paid investors a dividend for more than 180 years, without pause.

You don’t have to own individual stock to benefit from Canadian banking stocks. Because the Big Five banks are all among the largest companies in Canada, they are included in just about every broad market index ETF and mutual fund. If you own an ETF or Canadian Equity mutual fund in Canada, you’re likely investing in the banks.

What Are the Dividend Aristocrats?

If you’re researching Canadian bank stocks, one of the terms that will often come up is, “Dividend Aristocrats.” That’s because all of Canada’s big six banks are included on the list of Dividend Aristocrats. But what is a dividend aristocrat and what does it signify?

To become an “Aristocrat”, a publicly-traded Canadian company must meet three criteria: have a market cap of at least $300 million, have increased its dividend for the past 5 consecutive years, and be listed on the Toronto Stock Exchange (TSX) and S&P Canada BMI.

Currently, 88 dividend stocks make the grade. In short, the Dividend Aristocrats list signifies the top dividend stocks in Canada. It’s where true dividend investors look when they’re considering which stocks to buy.

Best Canadian Bank Stocks

Whenever you see a “best stocks” list, remember that there is always subjectivity involved. After all, markets are constantly shifting, and the criteria used to rank individual companies can vary widely. With this ranking, I’m taking the approach of, “If you can only own ONE Canadian bank stock in your portfolio, which one would it be.” You could easily switch up the order, and you wouldn’t be wrong.

Some analysts would choose National Bank as their #1, due to their current projected earnings, among other things. But if you can only have one, I’m going with the safest bets, TD Bank and RBC. They are the largest and best diversified of the Canadian banks, with strong domestic and global exposure.

1. Toronto Dominion Bank

Toronto-Dominion Bank (TSX:TD) is not only Canada’s largest bank by assets, it’s one of the most recognizable brands in North America. It was founded in 1955, upon the merger of the Dominion Bank and the Bank of Toronto.

In addition to its Canadian retail banking operation, one of TD’s biggest competitive advantages is its large U.S. footprint, which includes more than 1200 branches across 16 states and the District of Columbia. TD also owns a 13.5% share of U.S. discount broker giant, Charles Schwab. Over the past five years, no other Canadian bank has had a higher dividend growth rate than TD. As a Canadian bank stock, TD’s impressive earnings growth, exposure to the U.S. market vs. its peers, and overall stability make it a top choice for investors.

Stock Symbol: TD

Exchange: TSX

Market Cap: $166.36B

P/E Ratio: 10.78

Quarterly Dividend Yield: $0.79/3.46%

2. Royal Bank of Canada

Royal Bank (TSX:RY) is Canada’s largest bank by market capitalization and second-largest by assets. The company’s head office is in Montreal, but it was founded in Halifax in 1864. Royal Bank has more than 85,000 employees in Canada and around the world, and more than 16 million clients.

Royal Bank is the 5th largest bank in North America, and benefits from its global reach and diversification, with earnings spread across 5 different segments: Retail banking (personal and commercial), capital markets, wealth management, insurance, and treasury services.

While other Canadian bank stocks may be more advantageous at any given time, investors with a long-term mindset can never really go wrong buying Royal Bank stock.

Stock Symbol: RY

Exchange: TSX

Market Cap: $188.84B

P/E Ratio: 12.49

Quarterly Dividend Yield: $1.08/3.26%

3. Bank of Nova Scotia

The Bank of Nova Scotia (TSX:BNS), commonly known as Scotiabank, is Canada’s third-largest bank by market cap, at just over $100B. Like Royal Bank, it was founded in Halifax, Nova Scotia, in 1832. Scotiabank has more than 90,000 employees and serves more than 25 million customers worldwide. It’s unique in that it has a strong presence in Latin America, the Caribbean, and Europe. In fact, more than 50% of the company’s earnings come from global markets.

Scotiabank has a healthy 4.34% dividend yield and a 10-year dividend growth streak on the Dividend Aristocrats list. Canada’s leading online bank, Tangerine, is a subsidiary of Scotiabank.

Stock Symbol: BNS

Exchange: TSX

Market Cap: $100.76B

P/E Ratio: 11.58

Quarterly Dividend Yield: $0.90/4.34%

4. Bank of Montreal

Bank of Montreal (TSX:BMO) is Canada’s fourth-largest bank by market cap, behind Scotiabank and ahead of CIBC. It was founded way back in 1817 in, you guessed it, Montreal, Quebec, although its corporate headquarters are now located in Toronto. While it has a significant presence in the U.S., BMO generates the majority of its revenue in the Canadian market.

The company stands out for its impressive dividend history. It’s paid out the longest uninterrupted dividend in Canada, at over 185 years and counting. BMO has a higher than average exposure to the oil and gas markets, which was a drag on growth for a few years. However, it rebounded strongly in 2020, after the COVID-19 related market crash.

Stock Symbol: BMO

Exchange: TSX

Market Cap: $88.85B

P/E Ratio: 12.81

Quarterly Dividend Yield: $1.06/3.09%

5. Canadian Imperial Bank of Commerce

Like TD Bank, the Canadian Imperial Bank of Commerce (TSX:CM), or CIBC, was formed in the mid-20th century upon the merger of two long-standing banks: the Canadian Bank of Commerce, and the Imperial Bank of Canada. It’s the fifth-largest bank in Canada with a market cap of just over $66 billion.

Historically, CIBC has underperformed its peers but has improved its revenue and earnings growth in recent years. It currently trades at a premium compared to the historical average.

Stock Symbol: CM

Exchange: TSX

Market Cap: $66.73B

P/E Ratio: 11.47

Quarterly Dividend Yield: $1.46/3.90%

6. National Bank

National Bank (TSX:NA) is the 6th bank among Canada’s Big Six. While it is a national bank with a global presence, the majority of its earnings come from the province of Quebec. They are the largest bank in the Quebec market. National Bank has more than 21,000 employees and 2 million clients.

Like the other banks on our list, National Bank’s revenues are generated across several banking segments, including personal and commercial banking, securities, wealth management, and insurance. National Bank offers strong capital growth potential as well as a solid dividend yield.

Stock Symbol: NA

Exchange: TSX

Market Cap: $35.29B

P/E Ratio: 12.86

Quarterly Dividend Yield: $0.71/2.72%

7. Canadian Western Bank

Canadian Western Bank (TSX:CWB) isn’t among the Big 6 banks it’s far smaller than the other banks on our list, with a market cap of only $3.53B. Yet, the company boasts strong performance and is a member of the Dividend Aristocrats. CWB is based in Edmonton, Alberta. While most of its business happens in western Canada, it is expanding eastward, with a branch opening recently near Toronto, Ontario. Canadian Western Bank shares are more volatile than the big banks, but it’s grown its dividend for 28 consecutive years, an impressive feat.

Stock Symbol: CWB

Exchange: TSX

Market Cap: $3.53B

P/E Ratio: 11.74

Quarterly Dividend Yield: $0.29/2.87%

Common Dividend Stock Terms

If you’re new to stock investing, you may be unfamiliar with some of the terms used in this article. To help, I’ve included a brief description of some of them below:

Stock Dividend: A stock dividend is a payment to investors from a company’s profits, over and above a stock’s capital gain. The company’s board of directors determines the dividend rate they will pay to shareholders. Not all stocks pay a dividend. For a list of the top dividend-paying stocks in Canada, check out the Dividend Aristocrats list.

Dividend Growth Rate: The rate at which an individual company increases its dividend payout, expressed as an annualized percentage. Banks have a track record of consistently increasing their dividend.

Dividend Payout Ratio: Determines how much of a company’s after-tax earnings are paid to shareholders. Generally, a dividend payout ratio between 30% and 50% is ideal, but the ratio tends to vary depending upon the industry.

Dividend Yield: A ratio that demonstrates how much a company pays out in dividends in relation to its stock price. The dividend yield is calculated by dividing the dividends paid per share by the stock price per share.

Final Thoughts on the Best Canadian Bank Stocks

The banking sector is a great place for Canadian investors to put their money; its strong history suggests that you can expect capital growth, dividend increases, and stable revenue. TD Bank or RBC are good places to start if you can only buy one Canadian bank stock, while Canadian Western Bank or National Bank make great complimentary holdings. But the bottom line is that you can’t go wrong investing in any of the major banks.

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