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Dale Jackson

Personal Finance Columnist, Payback Time


Despite taking a recent beating on equity markets, Canada’s biggest banks have lived up to expectations to boost their dividend payouts as competition for yield heats up.

A broad market selloff has dragged share prices for the Big Six lower this year, but that hasn’t stopped many of them from continuing to reward shareholders with abnormally high double-digit dividend increases.

That’s a big deal for a wide swath of Canadians who rely on income from the big bank stocks in their retirement portfolios; either directly, in mutual and exchange-traded funds, or in company pension plans.

The big increase was widely anticipated after Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI), last November lifted payout restrictions that had been in place since the onset of the pandemic to protect against a wave of defaults that never occurred. 

Some banks have been more generous than others. Comparing the most recent quarter with the previous year, Bank of Montreal boosted its dividend 30 per cent, followed by National Bank of Canada with a 29 per cent increase.

Over the same period, Royal Bank of Canada raised its dividend 19 per cent, Bank of Nova Scotia and Canadian Imperial Bank of Commerce increased their payouts 14 per cent each, and Toronto-Dominion Bank has hiked its dividend 13 per cent.

Patrick Kim, partner and leader of fixed income growth at Toronto-based Georgian Capital Partners, said the dividend increases from the banks are “reasonable given the pent-up nature of the restrictions” and stated he expects dividend growth to eventually return to historic levels in the mid-single digits. The big Canadians banks have consistently raised their dividends for several decades and have never reduced them.   

“That message has been swamped by the overall selling in the equity markets as rising rates and related fears of a general economic slowdown are a headwind for bank stocks,” he pointed out in an email.   

All six banks currently pay annual dividend yields between four and six per cent. That’s high compared with the broader TSX 60, which currently pays out 2.9 per cent on average.

Bank dividends have become treasured by income-hungry investors over the past few decades as rock-bottom interest rates dragged fixed-income yields to the cellar. That’s changing as central banks hike rates. Yields on guaranteed investment certificates (GICs), for example, are now higher than some bank yields. 

“The yield spread over government bond benchmarks is still falling — not because of any slowdown in dividends, but because government yields shot up so quickly this year,” Kim said.

Rising interest rates and the increased competition from fixed income normally put pressure on bank stocks in the short term; but he said they lead to larger profits in the longer term. 

“We believe that the rising rates will support higher net interest income at the banks. Banks with strong capital structures are still well-positioned to keep increasing dividend payouts.”

He added that Canadian banks stocks should remain staples in any retirement portfolio for income and capital appreciation. Even when you factor in this year’s selloff, all the banks — with the exception of Bank of Nova Scotia — are trading above pre-pandemic levels thanks to steady earnings growth.

Some of their share prices have dipped well below 10 times earnings, compared with historic averages in the low teens.

If earnings truly are a reflection of a stock’s intrinsic value, the banks could be trading at a bargain.