Investing in Canadian Bank Stocks 2022

Investing in Canadian bank stocks for 2022 is quickly becoming a dominant theme across our MDJ virtual writers room – and indeed, many of the evidence-based Canadian dividend writers that we follow 

As we look forward to what 2022 has in store for our favorite Canadian bank stocks, one theme looks to be dominant: inflation.

Personally, I think the inflation fears might be a little overdone at this point, but the good news is that the companies that tend to best in high inflation environments are in sectors that can quickly pass along increased prices to their customer base without feeling a lot of pain.  

Owners of Canadian bank stocks know that the big banks operate in a very protective oligopoly here in Canada, and consequently, their wide moat allows them to pass along price increases very efficiently – thus protecting profit margins.

For the latest news on Canadian bank stocks I read 10+ publications pretty regularly, but the #1 source I trust is Mike Heroux. I approached Mike just over a year ago about putting together a special offer for Million Dollar Journey readers and he is now offering 33% off instantly for folks who want to checkout his Dividend Stocks Rock service and one-of-a-kind platform. It is hands down the best dividend advice in Canada – or anywhere else for that matter.

How Did Canadian Bank Stocks End 2021?

Bank

Dividend Increase

EPS

2017 Dividend

2021 Dividend

Payout Ratio

BMO.TO

26%

38%

$0.88

$1.33

41.05%

NA.TO

23%

61%

$0.56

$0.87

38.75%

TD.TO

13%

31%

$0.55

$0.89

45%

RY.TO

11%

20%

$0.83

$1.20

43.40%

BNS.TO

11%

45%

$0.76

$1.00

50.83%

CM.TO

10%

21%

$1.27

$1.61

44.51%

As you can see from the chart above, investors of Canadian bank stocks just wrapped up a banner year.  The dividend increases are lovely to see, and stock buybacks are an early Christmas present for shareholders.

Across the board we see relatively low payout ratios – easily able to soak up the proposed government tax increases – and stable dividends look to keep flowing for the foreseeable future.

This comes as no surprise to me as the banks have been paying and growing dividends long before Canada was Canada. That’s one reason why you’ll find Canadian bank stocks in our list of the Best Canadian Dividend Stocks

Below you can see how the Canadian bank stocks have done vs the TSX 60 Index over the past three years and past ten years respectively.  It’s worth noting that the total return represents the capital gains plus dividends.

Once again, big shout out to Mike Heroux at Dividend Stocks Rock for this info.  Make sure not to miss out on Mike’s exclusive discount for Million Dollar Journey readers – and then see what Mike’s analysis of the most recent news for Canadian Bank Stocks below.

Investing in The Big Canadian Banks – Overview

Royal Bank of Canada (RBC) 

RBC is the reigning king of Canadian banking. Royal Bank of Canada is a Canadian multinational financial services company and the largest bank in Canada by market capitalization. The bank serves over 16 million clients in Canada, the U.S. and 27 other countries. 

They are one of North America’s most diversified financial services companies, and provide personal and commercial banking, wealth management, insurance, investor services and capital markets products and services on a global basis. 

In summary, they are a dividend/earnings beast with so many ways to make money. 

TD Bank (TD) 

TD is also a very well-diversified bank that concentrates on Canadian and U.S. retail banking and wealth management. In fact, TD has more branches in the U.S., compared to Canada. That said, they generate more revenue and earnings in Canada. That speaks to the very profitable oligopoly situation in Canada. 

TD Bank Group offers a full range of financial products and services to more than 26 million customers worldwide. TD also ranks among the world’s leading online financial services firms, with more than 15 million active online and mobile customers. 

U.S. financial giant Charles Scwab (SCHW) purchased TD Ameritrade in 2019, giving TD a 13.5% stake in Schwab. Consequently, with TD you’re getting some very nice U.S. exposure.

Scotiabank (BNS) 

Scotiabank is the most International of the Canadian banks. Scotiabank serves more than 26 million clients in Canada, and offers a range of products and services in the U.S., Latin America (excluding Mexico), and in select markets in Europe, Asia and Australia. They have a very robust global and capital markets division that includes lending, deposit, cash management and trade finance solutions and retail automotive financing operations. 

While there is great potential in developing markets, they have not always executed with precision in these foreign markets and have generally lagged behind the leaders in recent years.

Scotiabank also owns Tangerine, Canada’s leading online bank. 

Bank of Montreal (BMO) 

BMO might be considered the most forward-thinking of Canada’s big banks when it comes to introducing cost-cutting options in recent years.

BMO serves more than 12 million customers, with 8 million via Canada operations. They operate in three divisions – personal and commercial banking, capital markets and BMO wealth management. BMO has been aggressively expanding its U.S. footprint through a series of operations. 

In Canada they are well positioned as the leading bank with respect to ETF assets under management. They are in second place in Canada, only behind BlackRock, but BMO is gaining ground and closing that gap. They also offer advice-Direct, a digital investment advice and portfolio management platform.

Canadian Imperial Bank of Commerce (CM)

CIBC can often be classified as the also-ran among the big 5 Canadian banks. They have made some missteps and have lagged the other banks with respect to diversifying outside of Canada.

In 2019, Barry Schwartz, chief investment officer of Baskin Wealth Management, offered “They seem to be swinging past the fastballs and missing the easy layups that the other banks get right.” That said, analysts appear to be warming to CIBC’s recent efforts. 

CIBC serves 10 million customers and operates Canadian personal and commercial banking, plus wealth management. In the U.S. they offer commercial banking and wealth management. They also have a capital markets division. 

Dividend investors love CIBC’s commitment to paying shareholders consistently and just because they aren’t the leading name, doesn’t mean they can’t hold leading value at a certain price point!

National Bank of Canada (NA)

National Bank is a regional bank (Quebec) that has been successfully diversifying. National is a very well-run bank, and has been the top-performing big Canadian bank for 20 years or more. It is the favourite value of Dividend Stocks Rock – our most trusted source for dividend growth information.

National generates 50% of its revenues in Quebec, which it then uses to fund additional growth projects outside of Quebec’s borders. Wealth management is growing at 15% annual over the last 10 years. The bank is also active in the U.S. and emerging markets. 

The fact is that National Bank is a bit smaller and more nimble (compared to the big 5) and more responsive as they seek acquisitions.  This could lead to outsized gains versus its large market cap banking brethren.

How Cheap Were the Canadian Banks?

In October of 2020 we suggested that the Canadian banks were the cheapest that they had been in quite some time. That estimate was based on the yield at the time (October of 2020) compared to the historical yield.

There is a correlation between the yield and forward returns. And typically, when the yield is high the prices are low and you’re able to buy more shares, bigger dividends and greater underlying yields compared to historical averages. 

In June of 2020, the average yield for the big Canadian banks was 4.5%. The projected forward 1-year return from that level was 17.3%. 

The Canadian bank stocks have certainly outdone themselves.

bank stocks graph 2021
bank stocks portfolio returns 2021
Source: Portfolio Visualizer

Keep in mind that this is a 13-month period, from October of 2020 through to the end of October 2021.

Beating the Market by 20%

The rate of return (CAGR), of the compound annual growth rate is 53.33%, vs 31.43% for the broader Canadian market. That is essentially a 20% market beat, but a rate of return that is 70% greater. (And that’s not factoring in that the banks are in fact a decent chunk of the Canadian market – meaning that without their outperformance, that index figure would look substantially lower.)

That yield and rate of return metric certainly worked – and then some. 

Will that metric work moving forward? We certainly hope not :) Here is the current yield for the Canadian bank stocks, on November 9, 2021. The yields are according to TD Direct Investing

  • RBC  3.27%
  • TD    3.45%
  • BNS  4.35%
  • BMO 3.04%
  • CIBC 3.93%
  • NA     2.72%

Average yield for Canadian banks – 3.46%

That level of yield would put us in the 1-year projected return level of negative returns. That seems a bit odd, and we would certainly not suggest that you sell your Canadian bank stocks. More on that below this table from TD Direct Investing that shows the current P/E ratios.

TTM offers the trailing or most recent price to earnings ratio based on the most recent earnings report. You will often see a forward P/E ratio mentioned for stocks that bases the valuation on the analysts projected earnings for the following year. 

The recent valuations …

canadian bank stocks value 2021

Those very sensible valuation levels do not suggest that the big Canadian banks are overvalued by any stretch. And thanks to Mike at Dividend Stocks Rock for this chart on valuation levels.

bank stocks value chart

We can see that the banks are within a very sensible range. And that is perhaps part of the magic of investing in the Canadian banks, they are very rarely expensive. They either appear to be at a perpetual discount to the market, or at the very least, generous earnings and generous and growing dividends are almost always available.

Investing in Canadian Banks: FAQ

The Insurers Were First to Move

Sun Life is combining a supplementary dividend (special dividend) and the quarterly dividend of $0.55 per share declared on November 3, 2021. Sun Life shareholders will receive a total quarterly common shareholder dividend of $0.66 per share or a 20% increase from the prior quarterly dividend payment.

Manulife Financial declared a supplemental dividend of C$0.05/share. Combined with its quarterly common shareholders’ dividend of C$0.28 per share announced on November 3, 2021, this supplementary dividend results in a total quarterly common shareholders dividend of $0.33 per share or an 18% increase.

Canadian Bank Stock Dividends For the Government?

The federal Liberal government is looking to hit the financials coming and going. First off, they are looking to increase the corporate income tax rate from 15% to 18% on all earnings above $1 billion. It is estimated that collectively it will cost the big banks about $1billion in profits each year.

Also, the big Canadian banks and insurers will be paying a Canada Recovery Dividend. The two programs are slated to begin in 2022-2023 and will run over a four-year period. The rate or amount of the Canada Recovery Dividend will be negotiated over the coming months. 

Analysts do not see this as a major hit to the very profitable banks and insurance companies. The taxes are likely already priced into the stocks, as bank analysts already know what’s coming down to the pipe. 

It may be best to focus more on the long term growth prospects and those growing dividends that will end up in your pocket. 

Canadian Banks and the Best Dividend Stocks in Canada

Name

Ticker

Sector

Div Streak

Dividend Yield

5yr Revenue Growth

5yr EPS Growth

5yr Dividend Growth

Payout Ratio

P/E

FTS.TO

Utilities

48

3.60%

5.75%

8.61%

6.79%

75.68%

22.60

ENB.TO

Energy

26

6.76%

2.95%

-6.54%

11.74%

221.66%

17.91

CNR.TO

Industrials

26

1.58%

1.85%

0.67%

12.97%

47.76%

22.97

T.TO

Communications

18

4.39%

4.30%

-2.17%

7.12%

125.93%

31.23

EMA.TO

Utilities

15

4.31%

14.57%

30.11%

8.28%

64.93%

33.78

NA.TO

Finance

12

3.54%

8.14%

13.60%

5.43%

31.37%

10.96

ATD.B.TO

Business

12

0.89%

5.90%

23.18%

20.88%

9.92%

16.40

AQN.TO

Utilities

11

4.85%

18.88%

42.88%

11.06%

44.49%

12.65

RY.TO

Finance

11

3.43%

5.67%

9.99%

5.92%

39.02%

12.64

ITP.TO

Business

3

3.35%

10.22%

9.53%

4.70%

48.72%

16.22

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As you can see from the chart above (will be updated throughout 2022), we love the Canadian banks as a group, with RBC, TD, and National Bank being our favourite picks going forward.  

The solid stability of the Canadian bank dividends helps all investors moderate their “animal spirits” when it comes to panic selling, and their track record when it comes to allocating capital for expenditures is second-to-non.

No one truly knows what sort of stock market returns we’ll see in 2022.  As we battle inflation and rising interest rates – but also benefit from booming economies – I don’t think there is anyone out there who can predict exactly where we’ll end up.  One thing we know for sure is that Canadian bank stocks will continue to pay solid dividends and produce profits regardless of what inflation numbers eventually come in at!

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Dale(@dale-roberts)
9 months ago

Was just checking in on this post. It was suggested that banks deliver 17% from that yield level historically. We’re above 14% already. Wow.

More to come if the fears of inflation and rising rates hang around.

Dale

charlie @ doginvestor.com
11 months ago

Banking stocks (not just Canadian) seem like a great bet due to their depressed prices and just the heady rise in tech stocks making them out of favour.
A 4% divi yield? what isn’t to love about that.

President Elect D Yaz
1 year ago

Thanks for the OSFI tip restricting dividend increases for the banks. I did not know that.