3 Elite Canadian Banks For Dividends: Royal Bank Of Canada (Part 1 Of 3)

Written by Dirk S. Leach

It is difficult to find safe investments with 3%+ dividend yields and solid growth prospects.

Many equities today are priced on the rich side of valuations resulting in lowered dividend yields.Low interest rates have made bonds a poor value for income seeking investors.

The benefits of investing in high quality stocks with above average yields and good growth prospects – trading at fair or better prices – are well-known to long-term investors.

What if you could quickly identify an entire group of these stocks?This article takes a look at one such group the market is overlooking:

The Canadian banking sector.

There are 3 large Canadian banks that rank as a ‘Buy’.

This article gives an overview of the favorable investment prospects of the Canadian banking system.It also analyzes 1 of the 3 highly ranked Canadian Banks in detail:Royal Bank of Canada (RY).

Why Canadian Banks ?

With all the banking names in the United States, why focus on Canadian banks for potential investments?

The first considerations are stability and credit worthiness.

Moody’s Investors Services ranks Canada’s Banking System number 1 in the world for financial strength and safety. The World Economic Forum has dubbed Canada’s banking system best in the world for eight years running. During the 2009 global financial crisis no Canadian bank failed or required a bailout.

A quick review of the fraction of non-performing loans for the banks in the European Union (EU), the US, and for Canada tells us that Canada’s banking system is in better shape.

  • 5.6% of loans at EU banks are non-performing
  • ~3% of loans at United States banks are non-performing
  • 0.6% of loans at Canada banks are non-performing

Canadian banks have non-performing loans factor five times lower than in the US.

Canada’s banks typically pay a higher dividend than do their US counterparts and they have been doing so for a very long time.For example, the Bank of Nova Scotia (BNS) has a flawless record of paying dividends every year since 1832.Only the Bank of Montreal (BMO) can top that with a track record extending back to 1829.  Toronto Dominion Bank (TD) is not far behind having paid dividends since 1857.

Dividends are important to the Canadian investors and to the Canadian banks paying them.I like that.

Finally, if you are going to invest outside of the US, there is some comfort in investing in Canadian equities.While Canada is not the US, it is also not all that different in its business culture, laws, regulations, and values.

Narrowing the Field

I screened the 5 largest Canadian banks looking at 10 year compound annual growth rates for revenue, EBITDA, EPS, dividends paid, and the most recent dividend payout ratio.The list includes the previously mentioned banks BMO, BNS, and TD as well as the Royal Bank of Canada (RY) and the Canadian Imperial Bank of Commerce (CM).A summary of the basic screening data is provided below.

Top 5 Canadian Banks

Source: Author

Based on this screening, I selected BNS, RY, and TD for further analysis.BNS, RY, and TD have consistently grown revenue, EBITDA, EPS and dividends paid out to investors by solid margins compared to BMO and CM.

Canadian oil producers are in no better shape than those in the US.I thought it prudent to look at the loan book exposure to crude oil production and production related companies.This proved very enlightening as I found that TD had the lowest exposure at about 1%, RY also low at 1.6%, BNS rather high at about 10%.

BNS’s 10% exposure to the oil and gas industry has been a challenge for BNS over the last couple of quarters and last quarter BNS raised its loan loss reserves by 40% primarily to cover expected defaults in the oil and gas industry.With BNS having taken a large reserve last quarter and the price of oil slowly on the rise over the last quarter, BNS appears to be well positioned to ride out this latest oil and gas downturn.

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Disclosure: None.

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