The best Canadian bank stocks to invest in now

Here are some of the best Canadian bank stocks to invest in, with basic financial numbers and analysis

The best Canadian bank stocks to invest in now

Bank stocks can offer a lucrative opportunity for individual investors and investment firms looking for stable returns coupled with long-term growth. Canada’s banking sector has consistently demonstrated a high degree of resilience and stability, making it an irresistible option for even the savviest investor.

Choosing the best Canadian bank stocks that offer a good balance of financial performance, growth potential, and market positioning is crucial to achieving financial objectives. In this article, we look at some Canadian bank stocks and explore the top contenders that deserve your attention—not to mention funds—as an investor.

Why is it a good time to invest in Canadian bank stocks?

As of this writing, it’s still a good time to invest in Canadian bank stocks, as analysts predict that the local economy will remain steadfast and avoid a recession.

Moreover, Canadian bank stocks are still trading at less than ten times their earnings. The average dividend yield of nine of the largest banks is at 5%.

Why invest in Canadian bank stocks?

In general, it’s wise to invest in stocks of any of the Big Five (or Six, when the National Bank of Canada is considered) due to their resilience, solid reputation, and dividend payments. Investors can rely on shares of these banks to grow reliably and consistently, even during uncertain times or financial crises.

However, not all the best bank stocks are always from the Big Five. There may be times when these banks fall off the list and smaller banks take their place. This can occur due to market volatility, acquisitions, mergers, and other factors.

Most banks in Canada are renowned for their conservative lending policy, so they’re less prone to any shocks (or aftershocks) in the global economy or financial markets. Their conservative approach to lending can also lead to better investments in other companies, enabling them to pay out dividends. And speaking of dividends, some of these bank stocks have attained the status of Dividend Aristocrat.

What are dividend aristocrats?

These are companies that not only pay out dividends, but meet these three criteria:

  • Listed on the Toronto Stock Exchange (TSX)
  • Have a market capitalization of at least CA$300 million
  • Increased its dividend for a minimum of 5 consecutive years

In Canada, the dividend aristocrats are composed of around 88 to 93 companies, with the Top Five banks consistently paying dividends for over 100 years.

Indicators of a good bank stock

There are some figures that can be used as indicators of a stock’s value and growth potential. Here are key indicators to look at before investing:

  • Market Capitalization aka the market cap, this is the total value of all the company’s shares of stock. The market cap can give investors a clearer picture of the company’s size relative to its competitors. This is calculated by simply multiplying the total number of outstanding shares by their share price.
  • Price to Earnings (P/E) Ratio indicates whether a stock’s price is high or low relative to the company’s earnings. To arrive at this figure, the company’s current share price is divided by its EPS or Earnings Per Share.
  • Price-to-book (P/B) Value Ratio is a ratio that compares the current market cap of a company to its accounting value. To get this ratio, the company’s stock price per share is divided by its book value per share. Investors looking for a stock with good growth potential usually choose those with a low P/B ratio. This means they will end up paying less for stocks with more book value.
  • Dividend Payout Ratio (DPR) tells how much a company pays out to investors in dividends, in comparison to the earnings of the stock. The ratio is calculated by dividing the annual dividend per share by the EPS. The DPR is important in that it can show how well a company’s earnings can allow for dividends.   
  • Dividend Yield indicates how much a company pays in dividends yearly, relative to its stock price. To arrive at the dividend yield, the annual dividend per share is divided by the price per share.

The best-performing bank stocks

There are good reasons for investing in Canadian bank stocks now, but as with all investments, these come with associated risks.

For example, if the housing market were to contract, this would greatly affect bank profitability and of course, their stock prices and dividend payouts. Before thinking of investing in bank stocks, delve deeper into their performance and decide if these investments match your financial goals and risk appetite.

Wealth Professional Canada used Simply Wall St.’s and YCharts’ data as of October 24, 2023 to find the best Canadian bank stocks for 2023. We combine these with key indicators listed above and insights from experts.

Here are some of the best Canadian bank stocks to buy now:

1. Royal Bank of Canada (RY-T)

Market Cap: $113.45 B
P/E ratio: 10.54
P/B ratio: 1.432
Dividend Payout Ratio: 51%
Dividend Yield: 4.91%

Canada’s largest bank in terms of market cap, Royal Bank of Canada (RBC) is growing faster than its competitors. RBC still has a solid growth rate and has delivered a considerable 5.3% growth in earnings for the past 5 years. This may not sound like a very rapid growth rate, but RBC stock is quite affordable, trading for a little over 10 times its earnings.

RBC has also recently made a significant acquisition: HSBC Canada, a subsidiary of one of the UK’s largest banks. The deal is said to be worth $13.5 billion and can potentially increase the profits of RBC to a billion more each year. To date, this deal is deemed by far the largest single acquisition in Canada’s banking history.    

2. Toronto Dominion Bank (TD-T)

Market Cap: $104.37 B
P/E ratio: 9.94
P/B ratio: 1.364
Dividend Payout Ratio: 49%
Dividend Yield: 4.90%

Another top Canadian bank stock worth buying now is Toronto Dominion. Trailing just behind the behemoth that is Royal Bank of Canada, TD is well known for its strong customer focus coupled with innovative banking solutions. With significant footprints in both Canadian and US financial markets, TD can provide investors with broader market access.

This stock has consistently delivered dividend growth alongside solid earnings growth, making it an appealing investment for those seeking long-term returns and great stability.

3. Bank of Nova Scotia (BNS-T)

Market Cap: $49.86 B
P/E ratio: 8.67
P/B ratio: 0.972
Dividend Payout Ratio: 64%
Dividend Yield: 7.5%

Bank of Nova Scotia or Scotiabank is one Canadian bank that prides itself with its extensive operations beyond the country’s borders. Scotiabank has significant interests in Latin America and could provide investors with the unique opportunity of exploring other emerging markets.

Scotiabank maintains a solid track record of resilience, and the capacity to pay out dividends even during an economic downturn. This bank stock can be appealing to investors who want greater diversification and high growth potential from international markets and investments.

Read more: Is Scotiabank a good bank stock to invest in?

4. Bank of Montreal (BMO-T)

Market Cap: $55.50 B
P/E ratio: 10.26
P/B ratio: 1.038
Dividend Payout Ratio: 57%
Dividend Yield: 5.5%

As one of Canada’s oldest established banks, Bank of Montreal (BMO) has a solid reputation of competency in delivering quality financial services.

BMO provides personal and commercial banking, investment banking, and wealth management. This bank is reputed for its consistent dividend payout and reliable earnings, making it one of the best Canadian bank stocks. It’s an excellent choice for those looking for a stable investment that provides dividend income.

5. Canadian Imperial Bank of Commerce (CM-T)

Market Cap: $32.91 B
P/E ratio: 9.801
P/B ratio: 0.9433
Dividend Payout Ratio: 69%
Dividend Yield: 7.1%

The Canadian Imperial Bank of Commerce (CIBC) is yet another established bank with a strong market presence in Canada. CIBC focuses mainly on providing banking and financial services to businesses, institutions, and individuals.

The bank has an excellent track record of providing stable and reliable growth for earnings and dividend payouts. This is another bank stock that any stability-seeking investor should consider. One characteristic that sets CIBC apart from the other banks is its ability to use and adapt technological innovations to better meet the evolving needs of customers.

6. National Bank of Canada (NA-T)

Market Cap: $28.77 B
P/E ratio: 9.138
P/B ratio: 1.346
Dividend Payout Ratio: 41%
Dividend Yield: 4.8%

A prominent and well-known bank in Quebec, the National Bank of Canada offers financial services to individuals and businesses. The bank’s strong regional presence allows it to focus on giving more personalized solutions to its customers.

National Bank has consistently delivered dividends along with excellent financial results, so its stock is a good choice for investors seeking diversification and exposure to the Quebec market.

7. Laurentian Bank of Canada (LB-T)

Market Cap: $1.1 B
P/E ratio: 5.624
P/B ratio: 0.4075
Dividend Payout Ratio: 41%
Dividend Yield: 7.4%

Laurentian Bank rounds up our list of the best Canadian bank stock. As with the National Bank of Canada, this is another bank in Quebec, albeit much smaller. Laurentian Bank’s localized focus has enabled it to grow significantly, thanks to its deep understanding of Quebec’s diverse communities and economy.

Despite Laurentian Bank’s smaller size compared to the other banks, it has shown resilience and established a reputation for being a strong bank. Investors interested in exposure to a smaller bank with high growth potential may want to consider trading in Laurentian Bank stock.  

In this video, you’ll hear from iA Wealth Senior Advisor Allan Small talk about his preference for the Canadian bank sector and its stocks over REITs, energy, and tech stocks. Towards the end, he explains why some of the Big Five, and Toronto Dominion’s stock have good long-term growth potential:

More reasons to invest in Canadian bank stocks

Here are a few more compelling reasons to invest in the best Canadian bank stocks:

History of stability

the Canadian banking sector has demonstrated rock-solid stability and resilience during uncertain times. In fact, in 2021, two Canadian banks gained the distinction of being counted among the world’s most valuable brands.

The Canadian banking system is often seen as among the most stable sectors globally. During the financial crisis in 2008, not a single Canadian bank collapsed or needed a government bailout – proof of the system’s strength.  

It’s an Oligopoly

While this sounds like a contradiction in a democratic country like Canada, having five banks make up most of the sector means there’s less competition. This also means better chances for investors to make higher profits.

Generous with dividends

It's probably safe to say that Canadian banks are quite generous when it comes to dividend payouts. Some banks here even give dividends that have increased by double digits, despite some of them seeing drops in their share prices.

Well-regulated sector

The Canadian banking sector is renowned for having a lot of oversight. This, coupled with their conservative lending policies, make it a safe and secure sector to invest in.

Good diversification of investments

Some banks may only service Quebec or a few of the regions or territories, but there are those that have business interests in the US, Latin America, and Asia. Assembling a diverse portfolio of stocks from these banks can make it easier for investors to maximize earnings and manage risks.

Embrace new technologies

In general, Canadian banks readily welcome innovations that can make operations more efficient and ensure continued growth.

Some investors may be at a loss as to which Canadian bank stock to buy, but the Big Five and many domestic banks can offer a solution.

Depending on your risk tolerance and objectives, a stock portfolio that includes the Big Five and stocks of smaller banks with high growth potential seems promising. Such a portfolio can maximize earnings while managing risk.

Are you convinced that Canadian bank stocks are a good investment? Which Canadian bank stock will you consider? Let us know in the comments!