Domestic bank stocks have performed so well for so long that the only real investment question is, "Which one should I buy?" I think I might have found the answer: buy the highest-yielding bank stock at the beginning of every year.
This table shows the bank stock paying the highest dividend yield at the beginning of every year since 1998 and the subsequent twelve month total return.
In ten out of 14 years, the bank stock with the biggest yield outperformed the average total return for the six biggest Canadian banks. In some cases the outperformance is dramatic – 1999 through 2002, 2005, 2008 and 2009 are good examples.
In years where the strategy didn't work, investors were rewarded the next year by sticking with it. The 3.3 per cent underperformance in 1998 was followed by a 9.2 per cent gain in 1999. 2008 was an even more explosive comeback.
The strategy is working again in 2013. BMO had the highest yield at the beginning of the year and its 16.33 per cent total return so far has easily outdistanced the 11.7 per cent average.