October 28th, 2010 | 
Category: 
Image via WikipediaIs there a difference between owning one of the top 5 banks? I am curious because the core business of banking in Canada is relatively the same. From a banking service, they all charge fees that we hate as customers and love as investors (that’s the dividend!). They all provide a discount broker and many other financial services that can help you buy a house or, low and behold, buy mutual fund for an RRSP … So what makes you pick one over the other?
Here are the 5 major banks sorted by market capitalization
- Royal Bank of Canada (TSE:RY) (NYSE:RY) – 77.38B$
- Toronto Dominion (TSE:TD) (NYSE:TD) - 63.67B$
- Bank of Nova Scotia (TSE:BNS) (NYSE:BNS) - 56.26$
- Bank of Montreal (TSE:BMO) (NYSE:BMO) - 33.83B$
- Canadian Imperial Bank of Commerce (TSE:CM) (NYSE:CM) - 29.89B$
All of them pay a decent dividend and a payout ratio in the 50% range. So what makes you pick one over the other? The P/E is approximately in the same ball park. Growth target is based on asset value from investors, new customers and what asset they will buy and which country it’s from mostly.
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You could pick one at random and do well over time. I do, however, like to look at the immediate dividend reward. The faster my money starts working for me the better. These days, BMO would be my pick. Note that I currently own BNS and BMO. RY has been hurt a little recently and it’s trading unusually lower and could provide an good entry point opportunity.
Here is a theory, if you had a position in a lower dividend paying bank, what are the disadvantages to switching to a higher paying one? What is preventing an investor from accelerating dividend growth by switching between them when the current holding is out of favor?
Readers: What makes you pick one bank over another?
I actually bought shares in National Bank of Canada (NA) a while ago, and had considered switching to a different bank stock. I think I will hold on to it for now though. With a P/E of 11.62, a yield of 3.76%, and maintaining or increasing dividends for 18 years in a row, I see it as a contender with the other top banks.
I love the post! This is a hard question and to choose the bank is a tough one.
You could pick all the banks and have an average position, or you could pick one bank and hope it takes off.
Frankly before making this decision, I would have to look at the bank international potential as well. Canada has only 30 million people in it–if any of these banks are making a presents know overseas or down south, that would be the bank I would pick.
I would love a follow up post on that!
@Mikazo
The only reason I did not include NA bank is because it's often rumored to be a take over target and they are not global enough even in Canada for now. That said, it's a solid investment.
@Dd
Thanks for the positive comments! I further analyzed my holding in BNS to see if I can increase my dividends by switching to a higher paying bank. Namely, is there a difference between them?
To answer a bit of your question TD has assets in the US. So does RY along with assets in the UK now. BNS has been building exposure in South America (not sure about US). I am not sure about BMO and CM. I have not research their exposure enough. It's a good idea for further research. The ex-dividend date is weeks away anyways …
BNS has very little exposure to the US. Their international presence is strong in Latin America and increasing in Asia.
BMO owns Harris Bank in the US.
@Frog Of Finance
Hey, Thanks for sharing. Much appreciated! At least 3 of them have exposure in the US and then some have exposure in other areas of the world.
I purchased shares in BNS, BMO, and CM back in the Spring of 2009. The reason was that these stocks were so beat up and the yields were so high that it was a no-brainer to pick up all three. The yield on cost for CM and BMO are 6% and BNS is close to 5%. I'll be really happy when they decide to increase dividends next year (hopefully).
I just do a mutual fund of a mix of them. Might as well hedge my bets
That being said, I bank with TD and CIBC so I am more partial to keeping those in my portfolio as I use their services and think that they do a good job.
TD is especially awesome at billing you for little charges you never knew existed. Great for a company, sucks as a customer.
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@FB
I looked at Mutual Fund and ETF and I find that it holds more than the top 5 banks and I would prefer to stick with the top 5. That's why I am not in a financial ETFs or Mutual Fund, I believe it dilutes what the top 5 can offer.
@Snow
Thanks for the kind comments. Very much appreciated!
Instead of owning shares in just one or two banks, I tend to focus on trying to have positions in most of the big banks such as CM, BMO, BNS, NA, RY and TD. I also have a small position in LB.
I like the point you mention about fees and stuff. My philosophy is that if you can't beat 'em – join 'em!
I'm also hoping that we'll see the big banks increase their divvey payout in 2011.
Nice post.
Nice post! Sorry, I'm a late arrival to your comments party
Yeah, like The Rat and probably you, I think positions in all big 5 or 6 would be great eventually, although b/c I'm heavy in financials already, I'm willing to wait some time (years) before acquiring all of them.
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