Canadian bank dividends are the top reasons for investing in Canadian banks

Banks remain key lower-risk investments for almost any portfolio. As well, the big-five Canadian bank stocks all have long histories of annual dividend increases.

Canadian bank dividends are a major reason to invest in banks.

Top banks offer Canadian bank dividends

Because they were growing, and cheaper in many respects than other stocks, Canadian banks have long given conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and records; low-to-moderate ratios of per share price-to-earnings; and above-average long-term capital gains.

That performance is likely to continue in the coming decades as well, in our view—even though some investors have begun to worry about the banks once again. They fear the banks will lose out to “fintech” (upstart financial technologies). Or they wonder if the banks will get caught unawares when interest rates make their long-awaited upward move.

My view is that the banks had a long time to prepare for the inevitable rise in interest rates, and the inevitable coming of fintech competition. In fact, they will probably wind up prospering in fintech, if not dominating it, as they did in stock brokerage, insurance and other financial areas that they have entered in the past few decades.

Canadian bank dividends can be a big part of long-term investment gains

We think that Canadian dividend stocks rarely get the respect they deserve from investors. But in a time of low interest rates, savvy investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price). Dividend-paying companies are responding by doing their best to maintain, or even increase their payouts.

If you stick with top quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Canadian bank dividends are some of the best

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

Hang on to your Canadian bank stocks

We’ve long recommended 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 mainly because of their importance to Canada’s economy.

Banks remain key lower-risk investments for a portfolio. As well, the big five Canadian bank stocks all have long histories of annual dividend increases.

We believe Canadian bank stocks are still well positioned to weather downturns in the Canadian economy, contrary to pessimistic forecasts on the banks’ prospects from some in the business media. They trade at attractive multiples to earnings and continue to raise their dividends.

How have Canadian bank dividends been for you? Share your experience with us in the comments.