Best Canadian Bank Stocks to Invest

Last updated: 2025/02/20 at 10:22 PM

wealthgram

10 Min Read

Canadian investors typically share a common interest in Canadian Bank Stocks. When speaking with Canadian dividend investors, it is common to find at least one bank included in their portfolio of blue-chip stocks. Often, investors begin with the top-tier bank stocks and then add one or two additional financial institutions to their holdings.

Contents

The Business of Canadian Banks Comparing the Canadian Bank Stocks What Defines The Best Canadian Bank Stock?What to look for in a Canadian Bank Canadian Bank Stocks Are Shareholder Friendly Canadian Banks Investment Approach Financial ETFs for Canadian Bank Stocks Top 3 Canadian Bank Stocks goeasy TD Bank National Bank

For many Canadians, a significant portion of their financial sector investments is allocated to one of the largest banks in Canada. I also suggest this for beginner portfolios. If an investor holds ETFs, banks are likely to constitute a considerable portion of the holdings, particularly in Canadian dividend ETFs, which heavily feature financial stocks.

Investing in Canadian bank stocks offers the potential for growth and a respectable dividend yield while minimizing downside risks. It is an excellent starting point for investors, especially during periods of low interest rates, as it provides a means of securing income. Furthermore, in the event of interest rate hikes, banks stand to benefit, resulting in a win-win scenario.

The major banks are Canadian Dividend Aristocrat (5+ years of dividend increases). If it was not for the change in financial requirements back in 2009, they probably would have made it to the Canadian Dividend Achiever list with 10 years of dividend increases. The S&P had to adjust the rules for a Canadian Dividend Aristocrat qualification as losing the large banks back in 2009 would have had a major impact on the ETFs tracking the aristocrats.

The Business of Canadian Banks

Familiarize yourself with the Canadian banking landscape before diving in headfirst. Canadian banks offer much more than mere cash withdrawal machines and should not be compared to REITs.

The largest Canadian banks provide a wide range of financial services, including retail banking, commercial banking, credit cards, mortgages, investment services, and wealth management. Their earnings are typically categorized accordingly, along with consideration of their country exposure.

Investing in Canadian banks is often a wise choice for individuals seeking quality stocks in Canada. Additionally, Canadian banks have a presence in the insurance industry, albeit a small one that has minimal impact on share prices. While banking fees in Canada are not strictly regulated, various financial institutions offer no-fee accounts, although fees tend to increase regularly resembling monthly subscriptions. Consider the methods by which these companies generate their revenue.

Comparing the Canadian Bank Stocks

Below is a categorized compilation of dividend-paying contenders, arranged by their market capitalization for reference.

Determining the best Canadian bank for investment purposes is not a straightforward matter, as it relies on the prevailing price at the time of your investment. The prominent major banks hold a near oligopolistic control over the Canadian market. Notably, these major banks have progressively acquired various digital banks, enabling them to continue their operations without significant changes.

Look at the performance of the big six banks over the past five years. They nearly all beat the TSX in the long run, and you get paid a healthy dividend.

What Defines The Best Canadian Bank Stock?

In order to identify the top investment opportunity in the Canadian banking sector, it is crucial to conduct both quantitative and qualitative analyses. While the quantitative analysis facilitates a side-by-side comparison of different banks, the qualitative analysis enables an evaluation of the strategic decisions made by the CEO and management teams in terms of growth prospects.

When considering the fundamentals, all Canadian banks engage in similar business activities with comparable fee structures. This encompasses both large banks with international reach and regional banks.

The competition among the Canadian banks primarily revolves around securing customers for banking services, mortgages, loans, and credit cards. Additionally, larger banks often dominate the competition for business loans.

What sets apart the large Canadian banks from their smaller counterparts is their expertise in wealth management and exposure to international markets. Notably, all major banks provide investment products, putting them in competition with insurance companies and independent asset management firms in this regard.

The last growth prospect the large banks have forayed into is for an international presence and growth in customers.

When you look at the big Canadian banks, there are two questions you want to ask from a qualitative perspective.

Is the bank operating efficiently?
Is the growth plan something you believe in? (Think of the Scotia Bank’s venture into Latin America)

What to look for in a Canadian Bank

Fiscally, banks generally manage their money well. Fees earned tend to follow each other. When one bank sneezes, the others tend to sneeze not long after, as they pretty much operate the same way in Canada. The banking sector is pretty small, and many small online banks end up being acquired by the big banks, so it’s a quasi-oligopoly.

As such, you end up looking for efficient banks and the ones that succeed in placing their growth bet. To that end, I focus on dividend growth within the top 6 banks, and I use the Chowder Score to decide on the best one to hold.

Canadian Bank Stocks Are Shareholder Friendly

The banks pay a good dividend and have regular share buybacks. Royal Bank initiated a 20 million share buyback in February 2019, and TD Bank initiated a 30 million share buyback in October 2020.

As you can see, the shareback helps with the stock value, and the dividends put money back in your pocket.

Canadian Banks Investment Approach

One potential investment strategy for Canadian banks involves purchasing the bank with the highest yield, as it suggests it may be undervalued. This approach has proven successful on multiple occasions over the past 15 years. However, since banks’ expansion efforts outside of Canada do not always yield the desired results, investors can have opportunities.

For added security, it is recommended to apply this strategy specifically to the major Canadian banks, if it aligns with your preferences.

Depending on your investment goals, you can either focus on individual top bank stocks or consider investing in exchange-traded funds (ETFs) that encompass the big six banks. Opting for a self-directed approach will help reduce management expense ratios (MER), but if you have limited funds, purchasing ETFs free of charge is also an option.

Financial ETFs for Canadian Bank Stocks

Buying individual companies may be daunting for some investors, and if you are looking for income, some ETFs buy the banks and use covered calls to boost the income. A financial ETF like FIE can generate much more income without capital appreciation.

Top 3 Canadian Bank Stocks

The 52-week range of a bank stock is not a reliable indicator for making a purchase decision. Canadian banks do not typically adhere to such a range. Instead, investors should look at the price-to-earnings ratio (PE) as a better gauge of whether the stock is currently favored or not.

It is worth noting that institutional investors hold a significant majority of shares in the major Canadian banks, reflecting widespread investor interest in these institutions. However, it is important to set realistic expectations for returns, as hitting a major success may be unlikely.

When screening for income-generating stocks, it is crucial to have access to accurate and detailed dividend data. Unfortunately, not many screening tools prioritize dividend information and strength. Consider using a specialized screener like Dividend Snapshot Screeners to evaluate dividend-focused investment opportunities.

goeasy

tse:gsy | Financial Services | Credit Services

This financial company is in the business of loaning money and is a growth option for your portfolio. It’s not an income play and it carries more risk than other financial institutions. The company profits from the difficult times individuals and families go through financially as an easier loan alternative.

The slowdown in immigration may impact the company.

TD Bank

tse:td | Financial Services | Banks – Diversified

TD represents an out-of-favor bank due to its challenges with money laundering in the US. The bank took a financial hit, but that created an opportunity, and it can still provide an opportunity.

National Bank

tse:na | Financial Services | Banks – Diversified

National Bank continues to be an excellent bank that continuously performs. Its upcoming acquisition of Canadian Western Bank will expose it to Western Canada and allow the bank to leverage its expertise with the existing business CWB.