Canadian banks with the highest dividend growth

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As a personal finance columnist who must be unbiased, I don't invest in the shares of the banks I often write about.

Am I missing out on the benefits of owning financial stocks? No way. I simply use an exchange-traded fund that covers the entire sector, the iShares S&P/TSX Capped Financials Index Fund. If I were to buy individual bank shares, I know exactly how I'd choose from among the many ways to slice and dice these stocks. Only one criteria really matters to me – dividend growth.

Consistent dividend increases are a sign of reliable earnings and confidence in the future. Bank stocks were the gold standard for dividend growth until the global financial crisis hit. No dividends were cut, but growth was halted until 2010. Now, as the most recent round of bank earnings show, the banks are back in action as dividend growers. As fiscal first-quarter earnings were reported in late February, Canadian Imperial Bank of Commerce, Royal Bank and Toronto-Dominion Bank came through with dividend hikes. Who has the best record over the past few years? Let's consult some research by Richardson GMP's analysts.

TD, National Bank of Canada and RBC come out on top, according to Richardson. Each has been announcing semi-annual dividend increases, as they did before the financial crisis. Elsewhere, Bank of Nova Scotia ranked mid-pack on dividend growth, while Canadian Imperial Bank of Commerce and Bank of Montreal trailed.

Longer term, the differences between the banks are not as dramatic as they are in the shorter term, Richardson said. "…But it's very clear that both CIBC and Bank of Montreal have lagged the group over the past 20 years when it comes to dividend growth," the firm wrote.

The biggest reason to focus on dividend growth is its high correlation with strong share performance. The banks with the highest cumulative three-year share price returns to Feb. 28 are RBC, up 27.2 per cent; TD, up 25.5 per cent; and, National Bank, up 19.1 per cent.

Income investors should take special note of the relative bank performance on dividend growth. The best inflation hedge of them all is a stock that raises its dividends every year. Globeinvestor.com data shows TD, National and RBC have grown their dividends by between 7 and 9 per cent annually over the past five years. The cost of living was up an average 1.7 per cent a year over that period.