It took a year and a half for Canadian bank stocks, many of which are prominent dividend aristocrats, to rise from the niche to the top of the podium. With inflation nervousness and concerns about faster-than-expected rate hikes, Canada’s major financial stocks suddenly became must-buy amidst an ever-improving macroeconomic backdrop.
Indeed, the banks have gone through years of horrible headwinds. But the tide is turning, and if you haven’t struck your note for a leading bank, you might want to do so before they increase their dividends at an above-average rate on what appears to be. a much quieter road.
Even if you are an adventurous young investor who doesn’t need passive income today, banks are a great hedge against a rising rate environment.
As always, there is always the best bank for your money. And while you can do extraordinarily well by purchasing the Big Six Basket or manually selecting a random sample, I think some names offer more for your money invested. In this article, we’ll take a look at one of my two favorite banking stocks to prepare you for a booming economy.
Canadian banks: from worst to first
Bank of Montreal (TSX: BMO) (NYSE: BMO) is one of the top dividend-paying Canadian stocks on my radar approaching an attractive price point. Shares of the name suffered the brunt of the damage last year, but have since hit new highs. The bank, which has a massive amount of commercial loans, many of which are exposed to the oil and gas sector, looked downright toxic in the worrying depths of March 2020.
Of course, BMO was not best equipped to deal with COVID-19 lockdowns compared to its Big Six peers, in particular Royal Bank of Canada, whose capital markets activity really smoothed the rough waters. However, BMO’s loan portfolio has never been as rancid as most investors thought. Provisions were skyrocketing, but the bank was not as it was during the Great Financial Crisis. BMO and all Canadian banks have been put to stress tests, with strong capital ratios.
Fast forward to today, and BMO stock is one of the best performing stocks on the TSX. All of a sudden the oil is white hot, and oil and gas is actually one of the best places to be with WTI flirting with US $ 75. Without a doubt, the overreaction of the past year has been an opportunity for a few courageous investors. While BMO stock appears to have corrected entirely to the upside, I would say there is still room to run, especially as Canada opens up.
The bottom line
Loan growth could explode as provisions decline. Add the prospect of higher rates to the equation, and it becomes increasingly evident that the big banks are at the start of a massive bull run, which will surely be full of generous dividend hikes. Given the macroeconomic backdrop, BMO stock is one of my favorite picks, and as its recent rally falters, I would prepare to make some buying.
The 3.3% yield is squeezed, but I think it is well positioned to grow as dividend hikes from the big banks generate a return.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We are straight! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer, so we post sometimes articles that may not conform to recommendations, rankings or other content. .
Insane contributor Joey Frenette owns shares in the BANQUE DE MONTRÉAL. The Motley Fool has no position in any of the stocks mentioned.