Income investors looking to diversify their dividend stock investments, should consider Canadian stocks. In particular, we like the Canadian bank stocks, as they tend to have lower valuations, and higher dividend yields than their U.S. banking peers.

As a result, income investors should not ignore Canadian bank stocks. The following 3 Canadian banks are attractive for income investors.

Royal Bank of Canada (RY)

The Royal Bank of Canada is the largest bank in Canada by market capitalization, and by total assets. RBC offers banking and financial services to customers primarily in Canada and the U.S.

The financial institution operates in four core business units: Personal & Commercial Banking (39% of FY2023 revenue), Wealth Management (31%), Insurance (10%), and Capital Markets (20%). Its revenue mix is roughly 59% Canada, 25% the U.S., and 16% international.

On 8/28/24, RBC reported quarterly revenue growth of 13%. Management put aside a reserve of C$659 million in the form of provision for credit losses (“PCL”) that dragged down net income. Earnings-per-share rose 13% year-over-year.

The bank’s capital position was still solid with a Common Equity Tier 1 ratio at 13.0%, down from 14.1% a year ago.

RBC makes strategic acquisitions to grow its business for the long haul. For example, in September 2022, it announced the completion of its acquisition of Brewin Dolphin, an award-winning wealth-management firm in the U.K., for £1.6 billion. 

Subsequently, it acquired HSBC Canada for C$13.5 billion in March 2024. From FY2014-2023, RBC increased its EPS by 5% per year in U.S. dollars. Management targets a medium-term growth rate of about 7%. RY has increased its dividend for 13 consecutive years and currently yields 3.5%.

Canadian Imperial Bank of Commerce (CM)

Canadian Imperial Bank of Commerce is a global financial institution that provides banking and other financial services to individuals, small businesses, corporations, and institutional clients. CIBC was founded in 1961 and is headquartered in Toronto, Canada.

CIBC reported its fiscal Q3 2024 earnings results on 08/29/24. For the quarter, the bank’s revenue climbed 13% year over year. Provision for credit losses was C$483 million, down 34% from a year ago.

The loan loss ratio was 0.29%, down from 0.35% a year ago. And net income came in C$1.8 billion (up 25%). Adjusted net income came in 10% higher at C$1.9 billion. Adjusted earnings per share rose 27% and the adjusted return on equity was 13.4%, down from 13.9% a year ago.

The bank’s capital position remains solid with a Common Equity Tier 1 ratio of 13.3% versus 12.2% a year ago.

From 2014 to 2023, the bank increased its EPS and DPS by 2.6% and 3.9%, respectively, per year in US$. Fiscal 2020 was one of those abnormal years with a pandemic triggering a decline in CIBC’s earnings. For the bank, one key area of growth is its loans and deposits portfolio. Rising loans lead to higher net interest income, which is a key source of CIBC’s revenues. CIBC’s fiscal 2023 deposits and loans and acceptances, respectively, rose 3.7% and 2.2% versus 2022. 

For fiscal Q3 2024, deposits and average loans and acceptances were up 5.5% and 2.2%, respectively, year over year. We project an EPS and DPS growth rate of 4.0% through 2029.

CIBC has increased its dividend for 13 years and currently yields 4%.

Bank of Montreal (BMO)

Bank of Montreal was formed in 1817, becoming Canada’s first bank. The past two centuries have seen Bank of Montreal grow into a global powerhouse of financial services and today, it has about 2,000 branches (including Bank of the West branches) in North America.

It generates about 45% of earnings from the U.S. (including Bank of the West) and the rest primarily from Canada. Bank of Montreal generates about 64% of its adjusted revenue from Canada and about 36% from the U.S.

Bank of Montreal reported its fiscal Q3 2024 financial results on 08/27/24. For the quarter, compared to a year ago, adjusted net revenue was flat at C$8.2 billion, while adjusted net income fell 8% to C$2 billion.

Adjusted diluted earnings per share (“EPS”) declined by 10% to C$2.64. Higher adjusted provision for credit losses (“PCL”) of C$906 million (versus C$492 million a year ago) weighed on earnings. The PCL on impaired loans to average net loans and acceptances was 0.50% for the quarter, up from 0.21% a year ago.

Average net loans & acceptances, and average deposits rose 3.7% and 8.8%, respectively, to C$665 billion and C$962 billion. The bank’s common equity tier 1 ratio remained solid at 13.0%, up from 12.3% a year ago.

From 2014 to 2023, the bank increased EPS by 6.6% in C$ but when translated to US$, the growth rate dropped to 4.6% per year. The company estimates medium-term EPS growth of 7-10% per year. However, actual results will be affected by forex fluctuations between the C$ and US$. 

Due to the recent higher PCL, BMO has underperformed. On a rebound to normalization, the stock could deliver better results through 2029, so for this period we use a 7% EPS growth and 6% DPS growth rate.

BMO has increased its dividend for 11 years and the stock currently yields 5%.

Disclosure: No positions