Dale Jackson

Personal Finance Columnist, Payback Time

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The dividend stream from Canada’s biggest banks could be widening, providing welcome relief for Canadian retirement investors struggling through an income drought.

Analysts are eagerly waiting for the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking watchdog, to lift payout restrictions placed on banks at the onset of the pandemic in March 2020 to protect against a wave of defaults that never occurred.

As a result, the big banks socked away an estimated $21.4 billion in allowances against loans that are still in good standing, according to a note this week from Toronto-based Hamilton Capital Partners.

Hamilton Capital expects the banks to raise their dividends as much as 25 per cent once they get the green light, and adds the hikes could be even bigger as profits continue to strengthen.

Bank dividends have been a saving grace for investors who need steady income to offset the risk from equities in their portfolios, and provide reliable cash in retirement. The fixed income stream has been reduced to a trickle since interest rates were slashed in the aftermath of the 2008 global financial meltdown.

Guaranteed investment certificates (GICs) are currently paying about one per cent and government bonds are yielding less. With the latest inflation tally topping four per cent, the situation becomes even more dire.

The big Canadian banks are a staple in the average Canadian investment portfolio either directly or through Canadian equity mutual funds and exchange-traded funds (ETFs). While fees on ETFs are low because the funds are passively managed, active managers can be worth the higher fees they charge because they can strategically position holdings to generate higher overall dividends.

Investors can avoid fees altogether (aside from basic trading fees) by buying the big banks directly, or adding to the banks they already own. Here’s some background on Canada’s five biggest banks (figures are as of early Friday afternoon).

Royal Bank of Canada

Canada’s largest bank is on track for a 3.3 per cent dividend yield this year. Not including dividends, RBC’s stock is up 84 per cent from the pandemic low and it’s posting a trailing price-to-earnings ratio of 12.5 times.

Toronto-Dominion Bank

The forward annual dividend yield for Canada’s most American bank is a bit higher at 3.6 per cent. TD shares are up 80 per cent from the pandemic low but, thanks also to strong earnings, their trailing price-to-earnings ratio is a below-average 10.4 times.

The Bank of Nova Scotia

Outside of Canada, Scotiabank is best know for its focus on Latin America and the Caribbean. Investors are set to be rewarded with an above average 4.4 per cent dividend yield. Scotiabank’s stock is up 75 per cent from its pandemic low, bringing its forward price-to-earnings ratio to 11.3 times.

Bank of Montreal

BMO investors are slated for a 3.3 per cent annual dividend yield. Shares are up 141 per cent from their pandemic low but those gains have been justified by strong earnings. BMO’s forward price-to-earnings ratio is currently 11.7 times.

Canadian Imperial Bank of Commerce

CIBC offers a 3.9 per cent dividend yield after the bank’s shares rallied 121 per cent from the pandemic low in March 2020. The stock is currently trading at 10.9 times forward earnings.

It’s important for income investors to keep in mind that income from stock dividends is not an ideal substitute for fixed income. Dividend payouts are at the discretion of the company, and how well their stocks perform is at the discretion of the free market. Before hitting the buy button, it’s always wise to consult a qualified investment adviser to discuss how banks fit in with your overall portfolio strategy.