The best bank stocks are the big-five Canadian banks. They are also the most consistent dividend payers

Canadian bank stocks have long been one of our top choices for growth and income, and we recommend that most Canadian investors should own two or more of the big-five Canadian bank stocks —Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s in large part because of their importance to Canada’s economy.

Here’s a closer look at one of them:

Bank of Nova Scotia is one of the best bank stocks, and one of our top picks among Canada’s big five banks right now, due to its wide international exposure.

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An example of one of the best bank stocks: Bank of Nova Scotia

Bank of Nova Scotia is Canada’s third-largest bank.

Bank of Nova Scotia continues to expand its Internet and mobile banking operations. As a result, it is reorganizing its branches and cutting jobs. These moves should cut $750 million from its annual expenses by 2019.

Excluding restructuring costs, Bank of Nova Scotia’s earnings in the latest quarter rose 4.9%, to $1.9 billion from $1.8 billion a year earlier. Due to fewer shares outstanding, earnings per share gained 5.4%, to $1.55 from $1.47.

Earnings from the Canadian banking operations (50% of the total) improved 7.8%. In addition to savings from restructuring, the gain also reflects the bank’s purchase of the Canadian credit card operations of J.P. Morgan Chase. The deal includes MasterCard and Sears Canada credit card accounts.

Bank of Nova Scotia’s international business (28% of earnings) reported 8.7% higher profits, thanks to increased lending in Mexico, Colombia, Peru and Chile. Earnings at the securities-trading division (22%) rose 12.3% on higher trading and corporate underwriting volumes.

The bank’s total revenue in the quarter rose 8.4%, to $6.6 billion from $6.1 billion. Loan-loss provisions jumped 19.0%, to $571 million from $480 million a year earlier.

The best bank stocks in Canada pay some of the best dividends

Canadian banks stocks have been some of the best income-producing securities. Below are 3 tips for using dividends as barometer for picking Canadian bank stocks.

1. Bank stock dividends are a sign of investment quality. Some good banks reinvest a major part of their profits instead of paying dividends. But failing banks hardly ever pay dividends. So if you only buy bank stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst banks.

2. Bank stock dividends can grow. Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But banks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That also gives you a hedge against inflation.

For a true measure of stability, focus on banks that have maintained or raised their dividends during economic and stock market downturns. These banks leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth. Canadian bank stocks are well known for their financial stability in the face of economic downturns.

3. Look for Canadian bank stocks with consistent dividends. One of the best ways of picking a quality stock is to look for banks that have been paying dividends for at least 5 to 10 years. Dividends are cash outlays that an unsuccessful bank could never produce. A history of dividend payments is one trait that all the best bank dividend stocks have.

Dividend hikes ahead for the best bank stocks

The big five Canadian bank stocks have long histories of annual dividend increases—and their strong profitability should let them keep raising their dividends.

In the wake of the 2008 financial crisis, banking regulators around the world have come up with on new regulations that would help avoid another crisis. The new rules forced banks to increase their capital reserves, which have helped them better absorb future loan losses.

However, Canada’s banks were already in much better shape than banks in other countries.

Do you have any of the best bank stocks in your portfolio? How have they performed for you? Share your experience with us in the comments.

This post was originally published in 2016 and is regularly updated.