Canadian Bank Stocks: Top Idea from One Reader

canadian-bank-stocksIn December, I published a reader mailbag issue of Income & Prosperity.  Although I had been flooded with more than 100 emails from our readers, I was only able to share my thoughts on a handful of stocks.
Today, I’ll share an interesting idea from one of our readers.
One Canadian reader who goes by J.A.M. wrote, “You asked what dividend stocks I have. I am in the Canadian banks for life. I [own] the top 3 banks: Royal Bank of Canada (NYSE: RY), The Toronto-Dominion Bank (NYSE: TD), and The Bank of Nova Scotia (NYSE: BNS). These companies make the cream of all Canadian corporate profits. 
These Canadian banks get paid first on every economic transaction in Canada. Their profitability is out of all proportion to their contribution to GDP. My family has invested in Canadian banks for decades, and over time with the dividends and capital appreciation you double [your investment] every eight or nine years or so.
I’ve been researching bank stocks for my $100k Portfolio real-money investment account. After immediately shunning the sector in the wake of the last financial crisis, I’ve invested in major banks in the U.S. and more recently Europe.  But I honestly haven’t spent much time looking at Canadian bank stocks.
The email from J.A.M. prompted me to dig into these Canadian bank stocks. I must say, they’re pretty attractive. The three Canadian banks mentioned have an average yield of 3.7%, and trade at 10 times 2014 earnings.
JPMorgan Chase (NYSE: JMP) and Wells Fargo (NYSE: WFC) each offer a current dividend yield of 2.6%, and trade for 10 to 11 times earnings.  That means that the Canadian banks offer an extra 1% yield. Analysts expect they’ll grow more rapidly in the next couple years, as the economic recovery continues to unfold.
The Canadian banks look to be committed to their shareholders.  During the financial crisis, their dividend cuts were mild.  And for the last several years, they’ve been regularly increasing their dividends.  RBC Capital Markets bank analyst Darko Mihelic thinks the top Canadian banks can grow their dividends at 5% to 12% in 2014.
Consider Toronto Dominion Bank, which is better known as TD Bank here in the U.S. In the last two years, the bank increased its dividend by 21%. Royal Bank of Canada and The Bank of Nova Scotia had similar dividend increases.
These Canadian banks seem to offer a lot to income investors:  low valuation, a decent yield, and dividend growth.  I think they should offer healthy dividends with the potential for decent appreciation.
If you’re thinking about adding Canadian bank stocks to your income portfolio, compare them with other blue-chip dividend stocks. Many of these stocks – like McDonalds (NYSE: MCD), Pfizer (NYSE: PFE) and Verizon (NYSE: VZ) – are trading at a P/E multiple of 13 to 16 times 2014 earnings.  And they pay yields of 3% to 4%.
With the Canadian banks, you get a similar yield at a discounted valuation to most dividend stocks.  It’s easy to see why J.A.M. is attracted to these Canadian bank stocks.  Thanks for sharing a great idea with your fellow Income & Prosperity readers and me.
What is your favorite dividend stock?  Do you have an idea that you want to share with your fellow Income & Prosperity readers?  Please send me an email at [email protected]

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