We’ve long recommended that all Canadian investors own two or more of the big five Canadian bank stocks. That’s mainly because of their importance to Canada’s economy.

The top five banks slumped deeply during the 2007-2009 market downturn, like most stocks. But since the market turnaround of March 2009, several of the top five have recovered and gone on (at least briefly) to all-time highs. Few other stock groups have done as well.

(In the latest issue of Canadian Wealth Advisor, our newsletter for conservative investing, we update our buy/sell/hold advice on Bank of Nova Scotia, which is the third biggest of the big-five banks. Read on for further details.)

Dividend hikes ahead for the big five Canadian bank stocks

The big five Canadian bank stocks have long histories of annual dividend increases. However, rising loan losses and writedowns of illiquid securities stemming from the recent financial crisis prompted them to conserve cash instead of raising dividends.

Banking regulators around the world are working on new regulations that would help avoid another crisis. The new rules will probably force banks to increase their capital reserves, which would help them better absorb future loan losses.

Canada’s banks are in much better shape than banks in other countries, so they should have little trouble adapting to the new rules, which will likely take effect in 2011. After that, we feel Canada’s banks will start raising their dividends again.

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Scotia: Canada’s most international bank

Each of the big five Canadian bank stocks have different objectives, so they’re not all suitable for every investor’s portfolio.

For example, Bank of Nova Scotia, Canada’s third-largest bank, is the most international of the big five banks. Unlike Royal Bank, TD and Bank of Montreal, it has avoided large investments in the U.S.

Instead, it prefers to focus on developing regions, such as the Caribbean, Latin America and Asia. That’s because the bank believes rising prosperity in these areas will spur greater demand for banking services. Bank of Nova Scotia cuts its risk by investing mainly in overseas banks that are established, and can benefit from its expertise. The international division now supplies 25% of the bank’s total earnings.

Recent purchases further enhance overseas operations

Bank of Nova Scotia recently announced that it is paying an undisclosed sum for Royal Bank of Scotland’s corporate and commercial-banking operations in Chile. The deal should close by the end of 2010.

Bank of Nova Scotia first began operating in Chile in 1990, and is now that country’s seventh-largest lender. That experience helps cut the risk of this purchase.

Here at home, the bank is buying the 82% of DundeeWealth Inc. (Toronto symbol DW) that it does not already own.

DundeeWealth manages investments and operates a brokerage business. The company also owns the Dynamic family of mutual funds, and provides financial-planning and investment advice.

The $2.3-billion, cash-and-stock deal will double the size of Bank of Nova Scotia’s mutual-fund business, and make it the fifth-largest mutual-fund company in Canada. It also gives the bank a number of new growth opportunities, including access to DundeeWealth’s high-quality clientele. As well, the bank may sell Dynamic funds through its branches in Asia and Latin America.

You can get our latest buy/sell/hold advice on Scotiabank and 20 other lower-risk investments in the latest issue of Canadian Wealth Advisor. Best of all, you can get this issue absolutely free when you subscribe today. Click here to learn how.