What are we looking for?
The best way to buy Canadian bank stocks.
More about today's screen
We'll get help from CPMS again today. Yesterday, we learned from CPMS that the best way to buy a Canadian bank stock over the long term is to buy the one with the highest dividend yield every year. On the flipside, the worst way is to buy the one that has the best price performance over the past 12 months.
We also found out that the best annualized total returns amongst the Big Five for the past 24 years are as follows: Bank of Nova Scotia 15.7 per cent; Royal Bank of Canada 15.46 per cent; Toronto-Dominion 14.92 per cent; CIBC 13.58 per cent; and Bank of Montreal 13.25 per cent. This assumes reinvested dividends.
Today, let's drill down to find out what bank we should be buying now for the annual rotation and also look at which banks provide the highest long-term dividend yield if you were to have bought each bank stock 24 years ago.
What is CPMS?
Each week we do a screen with CPMS, which is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. CPMS maintains a database of about 660 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
What did we find out?
If you were to buy one bank stock today based on dividend yield alone as of the end of October, then it would be Bank of Montreal (Oct. 29 is the date for which all long-term returns were calculated). It's important, however, to not get too married to this stock.
If you look at the best returns over the long term, then Bank of Nova Scotia, Royal Bank and Toronto-Dominion have much higher returns. As well, they also have much higher yields on the cost of the shares 24 years ago and much higher annualized dividend growth.
This all suggests that dividend yield and annualized dividend growth are good indicators of longer-term total returns.
Scott Adams