Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Big Five Canadian Banks Hard to Beat


Canada's banks have hit their share of potholes. But as the past two decades demonstrate, they're hard to beat as long-term investments.

Bank shareholders, rejoice.

With Bank of Montreal (BMO) raising its dividend by 2.9% on Tuesday - its first increase in five years - all of the Big Five are back in dividend growth mode following the financial crisis. Bank of Nova Scotia (BNS) also boosted its dividend by 3.6%, and we'll likely see more increases as other banks report this week.

For Bank of Montreal shareholders in particular, it's been a long wait. But bank investors have endured these sorts of dry spells before, and those who didn't panic were ultimately rewarded.

Royal Bank of Canada (RY), for instance, went for more than five years without a dividend increase in the early 1990s, when its balance sheet was hammered by a recession and a nasty real estate bust. But as the economy improved, Royal Bank's dividend more than doubled over the next five years, and doubled again in the five years after that.

The message for investors? The banks hit their share of potholes, but as long-term investments, they're hard to beat.

That leads us to today's question: Which of the Big Five has delivered the highest return over the past 20 years? This is a period that encompassed economic slumps, market meltdowns, financial collapses, energy shocks, wars, and - as mentioned - long periods with zilch in the way of dividend increases. In other words, we're not looking at the banks through rose-colored glasses here.

This is rearview-mirror analysis, of course, and our goal isn't to identify the bank you should buy now. Rather, we want to show how an average investor would have made out using a simple buy-and-hold strategy. We also want to demonstrate the importance of dividends-specifically, reinvested dividends-to a shareholder's total return.

We'll assume the investor started on July 31, 1992, and held until July 31 of this year. The first number for each bank is the simple annual price appreciation, excluding dividends. The second is annual total return, assuming all dividends were reinvested in more shares. The third is what an initial $10,000 investment would have grown to over the 20-year period, including dividends (but before inflation, taxes or commissions).

The banks are listed in ascending order of total return, from worst to best. But as you'll see, even the "laggards" of the group put up some solid numbers.

Bank of Montreal
Annual price return: 8.14%
Including dividends: 12.58%
$10,000 would be worth: $107,100

Canadian Imperial Bank of Commerce (CM)
Annual price return: 8.51%
Including dividends: 12.85%
$10,000 would be worth: $112,380

Toronto-Dominion Bank (TD)
Annual price return: 11.05%
Including dividends: 14.78%
$10,000 would be worth: $157,926

Royal Bank of Canada
Annual price return: 10.96%
Including dividends: 14.84%
$10,000 would be worth: $159,381

Bank of Nova Scotia
Annual price return: 11.52%
Including dividends: 15.49%
$10,000 would be worth: $178,619

How did the banks stack up versus the index? Glad you asked. All of them handily beat the S&P/TSX composite, which had an annualized price return of 6.29% over the same period.

We were unable to obtain an S&P/TSX total return figure from Bloomberg that went back as far as 1992, but if you add a dividend yield of 3% - roughly what the index is yielding now - you get a total return of 9.29% for the S&P/TSX. That's well below the total return of the banks.

It's worth repeating that the bank with the highest return over the past 20 years won't necessarily be the best performer over the next 20 years. Indeed, there are no guarantees that the banks as a group will continue to generate such strong returns in the future.

That said, this exercise shows that holding the banks through thick and thin, and reinvesting dividends along the way, has been a profitable strategy.

Editor's Note: This article was written by John Heinzl for MoneyShow.

Below, find some more great investing and trading content from MoneyShow:

This Coal Company Will Clean Up

A Better Utility for Dividend Investors

The Week Ahead: Did The ECB Put a Floor Under Stock Prices?

The Week Ahead: Can Stocks Ignore the World's Problems?

Twitter: @TopProsTopPicks

< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos