Top Canadian Dividend Stocks for 2021

Last year hasn’t been quite what we expected. And let’s admit it, while 2021 brings some hope, a number on a calendar is not magic.

If there is one single piece of wisdom you must remember from 2020 it is this: stay invested. If you stayed invested over the past 6 years, you went through much consternation, but also much growth and success.

2015: The market was going nowhere and CNBC said that 2015 was the hardest year to make money in 78 years.

2016: Brexit was on the rise, and stocks took a hit. The Brexit vote led to stock market crashes around the world. The market losses amounted to a total of 3 trillion US dollars by 27 June 2016.

2017: The market was trading at an all-time high, then the dreaded Hindenburg Omen returned. If you don’t feel like reading, let’s just say that the Hindenburg Omen called for a market crash.

2018: The Hindenburg prophecy was real! The market dropped during the second part of 2018, but the worst was yet to come. CNBC called for 2018 to be the worst year for stocks in 10 years (they have a knack for clickbait titles!).

2019: Oops! The apocalypse did not happen during this year.  In fact, 2019 was the best year of the past 10 years.

2020: The queen of uncertainties! However, if you look back at the past 6 years, nothing has changed dramatically. The apocalypse is always about to happen. Yet, if you stayed invested since December 2014 your portfolio is now clearly in better shape now with the US market having doubled in value and the Canadian market being up 50%.

Which Canadian Dividend Stocks Should be in your portfolio for 2021?

Today, I’m picking companies that will pay and increase their dividends and will likely provide you with a nice capital appreciation. The selection methodology of those companies is explained in this article:

What should a Dividend Growth Investor buy in 2021?

Here are some great stock ideas for 2021:

Franco Nevada (FNV.TO)

  • Market cap: 32B
  • Yield: 0.61%
  • Revenue growth (5yr, annualized): 18.05%
  • EPS growth rate ((5yr, annualized): 25.73%
  • Dividend growth rate (5yr, annualized): 10.57%
Source: Franco-Nevada website.

If you must buy a gold stock, we would go with Franco Nevada. Why? Because the company is somewhat sheltered against commodity price fluctuations and because it has no debt. Franco-Nevada doesn’t waste its time operating mines, but rather manages a portfolio of royalty streams. The company owns 45,300 square kilometers of geologically prospective land but will let “gold miners” spend their time and money on exploration. If the miners find something, the royalty will kick in. We like this “cash flow focused” business model. As FNV is a play on gold and precious metals, it enjoys stronger cash flows when gold prices surge. The company shows unparalleled portfolio diversification offering shareholders some peace of mind in volatile markets. It is a “Covid-19” proof business model.

Source: FNV November 2020 presentation.

When you look at how gold prices have fluctuated since 2008, you can appreciate FNV’s revenue relatively stable growth. The company is also showing 13 years of consecutive dividend increases which is quite a milestone in this industry! Franco Nevada is pretty much a money printing machine that will do well if the FED and Bank of Canada continues to print their own money!

The company shows larger gold reserves than the average in its industry. Considering FNV has no long-term debt, it could also easily acquire more assets and make sure its gold reserves are even larger. This would lead to a long period of positive cash flow generation (and you can see the dividend increases coming your way!).

National Bank (NA.TO)

  • Market cap: 24B
  • Yield: 3.97%
  • Revenue growth (5yr, annualized): 6.67%
  • EPS growth rate ((5yr, annualized): 4.79%
  • Dividend growth rate (5yr, annualized): 6.84%
Source: Building Magazine

If I had to rank Canadian banks, I would do it like this:

#1 National Bank: Smaller than the others and not considered by many. NA is swift and agile like a ninja. The company counts on a strong performance from capital markets and wealth management to grow their business. In the past few years, they have successfully expanded their business across the U.S. and a part of Asia (ABA bank in Cambodia).

National Bank enjoys a strong position in Quebec. It has been ignored by the 5 banks for a while leaving plenty of space for both Desjardins (credit union) and NA to expand their network. Today, NA is expanding its business through targeted acquisitions (Credigy a speciality credit firm in Atlanta, ABA bank in Cambodia).

NA has built an impressive wealth management division including National Bank Financial, National Bank Brokerage and Private Banking 1859. It has sold its mutual fund segment to Fiera a few years ago to concentrate on financial advice to its clients. This was a smart move as they couldn’t always compete with larger asset managers. At the same time, they are now able to pick any type investment product from any asset manager to build their clients’ portfolios.

Going forward, I think NA will continue to perform well (probably better than the other Canadian banks) and therefore, it remains my number one pick in this industry. The other banks are ranked as follows:

#2 Royal Bank: It’s a giant with ties to all business segments. I like their exposure to wealth management, capital markets and insurance. Even better, they post consistent results all the time.

#3 TD Bank: I love their classic but successful approach to banking. They have a strong exposure to the U.S. and understand how to combine their branches with wealth management services. A top performer.

#4 BMO: I like their guts (1st to offer ETFs in Canada, and the Harris bank acquisition) and their focus on wealth management and capital markets. However, their weak dividend growth (compared to its peers) and inconsistent results take them out of the top 3.

#5 Scotiabank: Their international narrative hasn’t generated results in the past 10 years. It’s still a good bank, but others are just better.

#6 CIBC: A classic savings and loan bank that doesn’t do anything better than TD. They do offer a great yield though.

You can watch my end of year Canadian banks review here.

Find out about 6 companies that will crush 2021

Each year, I compile a list of 20+ stocks that are expected to do better than the market. Back in December of 2019 we just finished an amazing year with double-digit returns. Then, the pandemic crushed the market (down 30%) and the flood of new money combined with strong growth from tech, consumer staples and gold brought the market back up by double-digits. Staying invested has been the key factor to the many who had success with their portfolio in 2020.

You can download 6 of my top 20 for 2021 right here:

Disclaimer: I hold shares of National Bank.

The post Top Canadian Dividend Stocks for 2021 appeared first on The Dividend Guy Blog.

What Should a Dividend Growth Investor Buy in 2021?

This is very funny. Before I started to write this introduction, I went back and read the 2020 forecast edition of my top picks for 2020, and here is how it started:

“Many readers have written to tell me they are sitting on some cash ready to be invested. Some of you sold a rental property or quit their job and received their pension plan value and decided to manage that pile of money on their own. Some others choose to keep their powder dry in order to capture market inefficiencies.

Fast forward one year, I bet that many of you may be in the same situation: waiting with a pile of cash. 2020 was crazy, I’ll give you that. In the end, it will be just another blip in the stock market’s history. The key was and still is a solid investment plan and a portfolio that is well-diversified. Those are always your best protections against anything that may be coming our way.

When is the right time to deploy a massive amount of money and what does a dividend growth investor buy in 2021?

Long-time readers will know that my answer to this question is “today”. Today is always the second-best time to invest your money. The best time was yesterday. But I know that no matter how many times I share this thought with you, some will be reluctant to act. Instead of showing you why investing now is crucial in your investing plan, let’s take care of that reluctance instead.

Do you know how we travelled for 1 year with no savings, a mortgage and 3 kids?

That’s right. In 2016, we bought a 25’ motorhome that we named “Freefall”, and we drove all the way down to Costa Rica with our three kids. We made the decision to leave everything behind for this dream during the summer of 2014 and we left on June 4th, 2016. The first two questions most people ask me when I announced that project are:

“How did you save enough money to be able to travel for an entire year?”

Short answer: I had virtually no savings (we left with $3K in our bank account).

“How did you manage the homeschooling of your children?”

Short answer: that was the hardest part of the trip ?.

As you can imagine, we had several “good reasons” to not invest (pun intended) all our energy in this project. We had debts (notably our mortgage), three young children, I’m not a handyman or an able mechanic, and we didn’t speak Spanish.

Any of those reasons were good enough to not go forward with the project. But, here’s our little secret on how we made all of this happen: we played “what if”. Instead of stopping at each obstacle, we just pretended it didn’t exist for a moment and continued our planning saying:

“What if we found a solution later on, where would we go?”

Then other positive questions were addressed such as “which nice adventures could we have with our children?”, “which villa could we rent in Costa Rica?” or “when could our family visit us during the trip?”.

We basically simulated our trip while ignoring most obstacles. I discovered the brain works like a very mysterious and spontaneous machine. While we were advancing in our planning, solutions to all our problems came along. We rented the house to a super nice family, teachers found us books we could use to homeschool the children, and my business (starting with Dividend Stocks Rock) started to pick-up and generate cash flow. On a side note, I learned to become a handyman while I had to replace my black water pipes and repair my awning after hitting a truck mirror with it… I guess we can learn anything when we really need to!

family travel

Now back to the investment strategy for 2021

For 2021, I’d play a bit more defensively. We would favor companies that don’t have too much debt (depending of the sector off course!) and strong growth potential no matter what happens.

First, you would need to build a buy list. It’s impossible to click on the “buy button” without having thought about it. Therefore, instead of thinking about all the great catastrophes that could hit your portfolio this year, how about listing the best companies that will help you achieve your goals? Let’s start by building a buy list.

Start with the dividend triangle

My first stock screener is a simple, but greatly effective one called the “dividend triangle”.  I’m looking for leaders in their markets with strong growth vectors. Companies that have the ability to not only increase their sales but also show profit growth. Finally, I’m looking for companies that are shareholder friendly and that will increase their dividend year after year. This is why the first three metrics in my filter are:

Revenue growth (5 year trend)

Earnings per share (EPS) growth (5 year trend)

Dividend growth (5 year trend)

If you are concerned about the market being overvalued, your best bet will rely on finding companies with a strong dividend triangle. Those companies won’t let you down during the next recession and will likely recover faster upon a market correction. I’m not the one saying this, even Vanguard established that dividend growers outperform the market with less volatility.

3 Metrics won’t do it for 2021

Using the dividend triangle will only get you on the right foot, but that’s far from being enough. First, 5-year metrics will only tell you what previously happened. This is not a guarantee for the future. To have a better idea of where to invest in 2021, I look at the 5-year trend for various metrics.

  • Dividend triangle trend (how revenue, EPS and dividend increase year per year)
  • Payout and cash payout ratios
  • Long-term debt and debt to equity ratio
  • Cash flow from operations
  • Price-earnings ratio (PE)

Studying trends will tell me which quarterly earning report to open and where to dig to find answers to my questions. Any jump or sudden drop in the following metrics need to be explained. Once this is done, I’m ready to write my investment thesis.

My Investment thesis for 2021

While many authors will predict what will happen in 2021, I’ll go the other way around. To be honest, I don’t really mind what will happen this year. What I know is that my portfolio will generate more dividends than it did in 2020 and 2019 and all the other years.

I don’t buy stocks for 2021, I buy stocks for the next 20 years. The power of dividend growth will do the rest for me. Here are a few examples of companies that should be in your portfolio.

Top stocks for 2021

Now, let’s continue to play “what if” and look at my top picks for 2021. Enter your email address here and you will access 6 of my favorite stocks for 2021:

By being cautious and sticking to your investment process, you will find that some of those companies will not likely be hurt that much even if we were in a recession. Most importantly, you can and will find companies that will continue their dividend growth policy while their share price decreases temporarily. I’ve tested my methodology over the past decade. Dividend growth investing worked even in 2018 when the market was down double-digits.

The post What Should a Dividend Growth Investor Buy in 2021? appeared first on The Dividend Guy Blog.

Alimentation Couche-Tard (ATD.B.TO): Invest In Electric Vehicles Growth Without Picking An EV Constructor!

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Electric vehicles are coming in strong… A world without car running on fuel? There’s a convenience store that already thought about it! Alimentation Couche-Tard is a Canadian company that operates a network of convenience stores mostly across North America. While its yield is very low, it is an interesting addition to any kind of portfolio, even retirees’.

With its stock price appreciation potential, its proven recession-resiliency business model, its growth by acquisition strategy and its electric vehicles superchargers, ATD has everything an investor needs! Let’s discuss this company more in details with this stock analysis.

Business Model

Alimentation Couche-Tard Inc. operates a network of convenience stores across North America, Ireland, Scandinavia, Poland, the Baltics, and Russia. The company primarily generates income through the sale of tobacco products, groceries, beverages, fresh food, quick-service restaurants, car wash services, other retail products and services, road transportation fuel, stationary energy, marine fuel, and chemicals. In addition, the company operates more stores under the Circle K banner in other countries such as China, Egypt, and Malaysia. Its operation is geographically divided into U.S., Europe, and Canada. Revenue from external customers falls mainly into three categories: merchandise and services, road transportation fuel, and other.

Investment Thesis

An investment in ATD is definitely not for an income-producing stock. However, if you are looking at the long-term horizon, your dividend payouts will grow in the double digits for a while and you will enjoy a strong stock price growth. ATD’s potential is directly linked to its capacity to acquire and integrate more convenience stores. Management has proven its ability to pay the right price and generate synergy for each deal. ATD shows a perfect combination of the dividend triangle: revenue, EPS and strong dividend growth. With the coronavirus’s impact on the economy, ATD may be able to acquire more chains at attractive prices.

In the video below, I’ve discussed recent news about the company getting into electric charging stations and how Alimentation Couche-Tard is set to become a dominant player in the electric vehicles growth.

 Potential Risks

Growers by acquisition are all vulnerable to occasionally making a bad purchase. While ATD’s methodology to acquire and integrate more convenience stores has been proven, it is important for them to not grow too fast or become too greedy and possibly overpay in the name of growth. Still, it doesn’t seem like this is an issue with the current management team. The economic slowdown will negatively affect its sales (notably fuel sales) in 2020 and 2021. The stock price may go sideways for a while.

Dividend Growth Perspective

The mediocre 0.70% dividend yield is so low ATD shouldn’t even be considered as a dividend grower. However, the dividend payout has surged in the past 5 years (+154%) and the stock price jumped by over 55% (including the stock price drop in early 2020). The only reason why the dividend yield is so low is because ATD is on a fast track for growth. ATD will continue increasing steadily its payout while providing stock value appreciation to shareholders.

Final Thoughts

It’s almost the end of 2020 and it has been a year filled with lots of ups and downs. Since this Holiday Season will be very unique and we will not have as many parties or traditional family gatherings to attend, you might want to take this time to look at your portfolio and get it ready for the New Year. Alimentation Couche-Tard can certainly help getting inspired!

In the past months, I’ve been working on a recession-proof portfolio workbook to help you reach your goals. It is a combination of actionable strategies and exercises helping you growing your confidence in investing. Get it for free now!

The post Alimentation Couche-Tard (ATD.B.TO): Invest In Electric Vehicles Growth Without Picking An EV Constructor! appeared first on The Dividend Guy Blog.

I Didn’t Like RioCan (REI.UN.TO) Before It Cut Its Dividend; What About Now?

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At the beginning of December, RioCan (REI.UN.TO) dropped a bomb for retirees: They slashed their dividend by 33%.

“As RioCan continues to navigate through the uncertain retail landscape created by the COVID-19 pandemic and faces an unknown length and breadth of closures, the Board has taken the prudent action of reducing our distribution. A more conservative payout ratio is important in this undeniably challenging environment despite our well positioned portfolio, solid base of tenants and deep liquidity,” said Edward Sonshine, Chief Executive Officer of RioCan. “At the same time, we believe the current circumstances present an opportunity for us to optimize our capital allocation towards accretive initiatives as we remain committed to driving value creation for our unitholders and increasing distributions from this new base as conditions permit.”

Source: RioCan Press Release

A lot of retirees have been devastated by that news. While I understand their pain and feel for them, I’m not so surprised. I didn’t like RioCan that much for many years. So here’s why it’s not part of my favorite REITs.

Business Model

RioCan Real Estate Investment Trust is a Canadian real estate investment trust which owns, develops, and operates Canada’s portfolio of retail-focused (90%), increasingly mixed-use properties. The REIT’s property portfolio includes shopping centers and mixed-use developments, with most of its properties located in Ontario, Canada. RioCan’s tenants consist of grocery stores, supermarkets, restaurants, cinemas, pharmacies, and corporations. Geographically, the company operates in Canada, which generates the majority of its total revenue, and in the United States.


Investment Thesis

In July, the investment thesis DSR members could read was as follows:

“The REIT is showing an impressive occupancy rate of year after year. Over the past couple of years, REI sold non-core assets to concentrate on what they know best. We like management’s new focus and we think it will help build additional values for investors in the future. Unfortunately, the REIT must face constant headwinds coming from the retail brick & mortar industry. The situation has been aggravated by the Coronavirus where REI collected only 66% of its rent in April. Since then, shopping malls re-opened, but we expect many bankruptcies among retailers toward the end of 2020 and the beginning of 2021. The dividend will not be increase in the upcoming years, and even a cut is possible.”

I wrote this investment thesis back in July while many financial analysts were calling the dividend safe. They claimed the REIT had ample liquidity and showing a decent AFFO payout ratio. They were right about the fact RioCan could afford the dividend. However, it’s not because you can afford a brand new Tesla that you should have one in your driveway.

To prevent dividend cuts, I have set Three Red Flags rules:

  1. Listen to the Market: when the market doesn’t like a stock anymore, you need to do your homework and to try to find out why. A high yield is an invitation for investigation.
  2. Look for an Absence of Dividend Growth: this is the first step to a dividend cut. You must dig deeper.
  3. Look at the Dividend Triangle: If EPS growth, Revenue growth and Dividend growth are lagging or go down, the dividend will hardly be sustainable.

RioCan FFO/unit growth has been modest since 2014, limiting the REIT ability to increase the dividend more consistently.

A FFO/unit growth of 2.54% per annum since 2014 didn’t offer much flexibility to increase the REIT’s dividend. Therefore, shareholders only receive on paycheck increase between 2013 and early 2020. The absence of dividend growth combined with weak FFO/unit increase over the past 6 years were signs that something wasn’t right. No investor can read the future and I could have been wrong, but these three rules often lead to dividend cuts. I just thought there were better and safer options for investors.

I’ve explained my three rules and the overall context around REI more in details in the following video.

Potential Risks

The retail brick & mortar business isn’t exactly skyrocketing now. The fear of seeing other stores like Target and Sears closing is omnipresent. RioCan will be affected by such events. Considering the severe recession we will be in, expect more bankruptcies coming in the upcoming quarters. Many shopping malls have re-opened, but customers are still shy in their spending habits. The fear of future lockdowns creates lots of uncertainties. Rent collection is not so bad so far, but there will be more retailers struggling in 2021 as payment deferral and Government help created a distortion between collection rate and the real financial situation of many tenants.

Since REI is well-diversified, management will surely find a way to manage through these troubled waters. Nonetheless, we don’t see it thriving in the coming years. RioCan is multiplying investments in apartment buildings to improve diversification and offset the bearish trend around many retailers. Will it be enough? Only time will tell.

Final Thoughts

Remember that around 90% of its business is in the retail sector. Therefore, RioCan remains risky in the current economy. Don’t expect a dividend increase anytime soon. The company will need its money to fund their projects and continue the shift towards more mixed-use properties.

What’s left of the dividend should be safe though. If you decide to buy it, consider REI as a speculative play; avoid putting more than 5% of your portfolio into it.

The post I Didn’t Like RioCan (REI.UN.TO) Before It Cut Its Dividend; What About Now? appeared first on The Dividend Guy Blog.

How Canadian Banks Fared Last Quarter?

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All Canadian Banks reported their earnings last week. As they are the heart and soul of the Canadian Economy, I’m always excited to follow their reports. Usually. if Canadian banks do well, the Canadian economy follows. If their quarter is hard, it also means most Canadian businesses are having a hard time.

I’ve previously shared my Canadian Banks ranking on this blog so this time I’ll just review my investment thesis and the potential risks for each of the Big 6!

Canadian Imperial Bank – CIBC (CM/CM.TO)

CIBC operates through the following segments: Retail and Business Banking, Wealth Management and Capital Markets. CM shows a more “classic” approach than its peers.

Investment Thesis

While CIBC lags behind the other banks on the stock market (along with ScotiaBank), it gives investors the opportunity to pick a 5% yield without much risk. We like its idea to grow through its wealth management division, but the integration of Private Bank will represent a crucial step. If you are looking for additional income, CM is probably one of the best picks on the Canadian stock market, but don’t expect the stock to soar. CIBC is trading at a low PE ratio compared to its peers. The reason is simple: less growth perspective. At least the dividend is not at risk, and you will enjoy consistent paycheck raises.

source: CM Q4 2020 presentation

Potential Risks

Put it like this, ask your 5-year-old to choose a Canadian bank based on its logo and you get a good investment… if it’s not CIBC! The bank is one of the worst in terms of returns over the past 5 and 10 years and is also the one with the least growth vectors. Its heavy concentration in the mortgage business could hurt CM’s results in the upcoming years as the housing market seems to reach a plateau and regulation tighten mortgage rules. Considering the unknown impact on the virus on the economy, we would rather go with larger banks such as Royal or TD. If you consider CIBC as a “deluxe bond”, you won’t be disappointed (high yield, mediocre stock price appreciation).

ScotiaBank (BNS/BNS.TO)

The Bank of Nova Scotia is known as Canada’s “international bank” and is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets, and other. It is the third- largest bank in Canada.

Investment Thesis

BNS is the most innovative bank in the industry. It has done lots of business outside Canada and always with an open mind. BNS deserves its international label with 40% of its assets outside Canadian borders. This hasn’t always been an advantage as BNS ran into its share of problems with Latin American economic struggles. Expected GDP growth for these countries is quite interesting (a lot higher than Canada and the U.S.), but it comes with its load of uncertainties and volatility. BNS is now a dominant player in Chile with its most recent acquisition of BBVA Chile in 2018. Unfortunately, the way COVID-19 has been spreading across South America and Mexico is a source of concern. The dividend is safe, but it will be a long road to recovery for BNS.

source: BNS Q4 2020 presentation

Potential Risks

The bank ran into several challenges such as the situation in Venezuela. It seems that being present in emerging markets is not always a plus. Overall, diversification is a good strategy, but BNS’ international presence adds more volatility to its business model. We see how the pandemic effects this business segment right now. The bank must take higher provision for credit losses. Following the most recent events, BNS along with all other Canadian banks being watched. Their response to the crisis and how the Canadian government responds will have an important impact on their stock price. Expect lots of volatility until we know the economic impact of the virus.

Bank of Montreal – BMO (BMO/BMO.TO)

Bank of Montreal conducts its business through four segments : Canadian personal and commercial banking, U.S. P&C banking, wealth management, and capital markets. The bank’s operations are primarily in Canada, with a material portion also within the U.S. It has a strong presence in wealth management through Harris Bank.

Investment Thesis

BMO decided to take the stock market path to ensure its growth. It was the first Canadian bank with its own ETF on the market. Competition is fierce but being among the first Canadian issuers surely helped to build momentum in a growing market. Over the years, BMO concentrated on developing its expertise in capital markets, wealth management, and the U.S. market. BMO also made innovative moves such as the introduction of its own ETFs and a robo-advisor. Growth will happen in these markets for banks in the upcoming years. BMO is well-positioned to surf this tailwind. When you can grab this bank with a 4% yield, you make a good deal.

source: BMO Q4 2020 presentation

Potential Risks

Relying on capital markets and wealth management as main growth vectors mean BMO can hit a speed bump. While their fact sheet shows a dividend growth of 8% CAGR over the past 15 years, BMO isn’t that generous anymore. After a pause of 3 years in its dividend growth policy (following the 2008 crisis), BMO started to grow its dividend again but lags its peers in that field. We don’t see any dividend increases in 2021 for Canadian banks (or maybe toward the end of the year). They must all deal with higher provisions for credit losses and thin interest margin. While they are well capitalized, this also means banks will be less generous. As interest rates would be stable at best in 2020, the interest rate margin spread will tighten limiting the bank’s ability to generate higher profit.

TD Bank (TD/TD.TO)

TD is the second largest Canadian bank by market cap and is often jockeying side-by-side for the 1st position with Royal Bank (RY). TD is the most classic bank in Canada with its business model focusing a lot on retail banking. Its portfolio is well diversified between Canada (61%) and the U.S. (30%).

Investment Thesis

A stronger economy from both countries led to TD’s stronger results between 2010 and 2020. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has a large exposition in major cities like Toronto, Vancouver, Edmonton and Calgary, combined with a strong presence in the US. With about a third of its business coming from the U.S., TD is the most “American Bank” you’ll find this side of the border. If you are looking for an investment in a straightforward bank, TD should be your pick. This bank is a good example of a perfect dividend triangle. Unfortunately, the pandemic will affect this triangle and you will have to wait until 2021 to see another dividend increase. Nonetheless, TD is a strong bank.

source: TD Q4 2020 presentation

Potential Risks

The housing market has been a concern since 2012, but TD seems to be managing its loan book wisely. The Canadian economy has been remarkably resilient too. A higher insured mortgage level in the prairies seems adequate while TD continues to ride the ever-growing downtown Toronto housing market. Keep in mind that a housing bubble is always just around the corner. Now that interest rates have been cut by the Central Bank of Canada, it will be difficult for classic banks such as TD to thrive. The interest rate margin is narrowing. The green bank will have to find other growth vectors to please investors. Follow the bank’s provision for credit losses quarter to quarter during the pandemic.

Royal Bank – RBC (RY/RY.TO)

Royal Bank is the largest bank of the group by market cap (it battles with TD). RY has a strong position in the personal and commercial banking sector (46% of its revenue). In 2015, RY bought City National, a Los Angeles-based bank focused on high net worth clients. The transaction opened US doors and another growth vector: wealth management.

Investment Thesis

Over the past 5 years, RY did well because of its smaller divisions acting as growth vectors. The insurance, wealth management, and capital markets push RY revenue. Those sectors combined now represent over 50% of its revenue. During the COVID-19 pandemic, these are also the same segments helping Royal Bank to stay the course. Royal Bank also made huge efforts into diversifying its activities outside Canada. Canadian banks are protected by federal regulations, but this limits their growth. Having a foot outside of the country helps RY to reduce risk and to improve growth potential. Royal Bank shows a perfect balance between revenue growth and dividend growth. It’s a keeper.

source: RY Q4 2020 presentation

Potential Risks

After the 2018 financial market crash, the bank put its focus on growing its smaller sectors. While wealth management should continue to post stable income, the insurance and capital markets are more inclined to hectic returns. As the largest Canadian bank, Royal Bank could also get hurt by a bearish housing market. There are some general concerns around Canadian Banks and how they manage their provision for credit losses. RBC loan portfolio has been affected by the pandemic, but provision for credit losses has been smaller for Q4 2020 vs Q3 2020. We will have to wait for next year to see if the economy will suffer from another virus outbreak before we can get the vaccine across the country.

National Bank (NTIOF/NA.TO)

National Bank is very small compared to the big 5 Canadian banks. As the sixth largest one, NA is mostly in Quebec with 62% of its revenues earned in this province. Its smaller size is currently paying off as National Bank was quicker to develop a strong brand in Wealth Management with Private Banking 1859 and built a highly profitable Financial Markets division.

Investment Thesis

Like BMO, NA aimed at capital markets and wealth management to support its growth. Private Banking 1859 has become a serious player in that area. The bank even opened private banking branch only in Western Canada to capture additional growth. Since NA is heavily concentrated in Quebec, it concluded deals to do credit for investing and insurance firms under the Power Corporation (POW). Branches are currently going through a major transformation with new concepts and enhanced technology to serve clients. While waiting for the results, it seems wise to invest in digital features to reach out to the millennials and improve efficiency. The stock has outperformed the Big 5 for the past decade as it showed strong results. Recently, NA is seeking additional growth vectors by investing in emerging markets such as Cambodia (ABA bank) and in the U.S through the acquisitions of Credigy. Can it have more success than BNS on international grounds?

source: NA Q4 2020 presentation

Potential Risks

National Bank is still highly dependent on Quebec’s economy. As a “super-regional” bank, NA is more vulnerable to economic events. So far, the covid-19 situation in Quebec as been well managed and NA posted satisfying results in May 2020. However, we are far from being done with the pandemic. Capital markets revenues are also highly volatile. NA could run into a bad quarter if the stock market enters into a bearish environment. The bank has considerable exposure to the oil market through its commercial loan portfolio. Overall, the bank performs very well, but usually take a little more risk to find growth vectors (such as ABA bank investment and capital markets). So far it has paid well, but it doesn’t mean it will always work.

Q4 2020 Earnings Review

Probably the best news of this quarter was: no dividend cuts! Canadian banks had also a strong message to send to all investors. How about I save you some time? I went through the earnings reports more in depth in the video below. You’ll get all you need to know without having to read hundreds of pages!

Final Thoughts

National Bank is still my favorite. I really like their growth perspectives and how they built a strong brand in wealth management.

Overall, Canadian Banks have showed their resiliency once again and you can sleep well; they will continue to pay the dividends promised. I don’t expect any dividend increase for the next quarters as banks should remain cautious and keep things under control. The pandemic also forced them to invest some of their liquidity into mobile and online banking. I believe this is a smart move.

Finally, I will never stress about this part enough. While any of the Canadian bank is a good pick for a dividend growth investor, keep in mind that you shouldn’t have more than one or two in your portfolio. Diversification remains a key point to prevent you from losing your hard earned money.

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