5 Banks That Will Let You Sleep at Night

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Will retail investors ever buy bank stocks again?

That might sound like a ridiculous question to ask, but there is no doubt that investors are wary of big American banks right now. Since the beginning of the year, for example, Bank of America (NYSE: BAC  ) is down over 50%, and Citigroup (NYSE: C  ) is down over 40%. Overall, it feels like investors don't trust banks anymore, so these companies have been hit hard as a result.

I was talking about this subject the other day with Jim Gillies, advisor of Motley Fool Options, and he told me that there actually were some bank stocks out there that would allow investors to sleep well at night. He suggested that investors look "north of the border" at Canadian bank stocks, which he described as the "ultimate stocks for widows and orphans" for their reliability.

According to Jim, Canadian banks are attractive for the following reasons:

  1. They have compelling valuations.
  2. They have impressive and growing dividend yields.
  3. They operate in a relatively safer environment.

And here are five Canadian banks that investors should consider:


Market Cap (in billions)

Dividend Yield


Bank of Montreal (NYSE: BMO  ) $36.4 4.8% 11.4
The Bank of Nova Scotia (NYSE: BNS  ) $55.2 4% 11.4
Canadian Imperial Bank of Commerce (NYSE: CM  ) $29.3 4.8% 11.4
Toronto-Dominion Bank (NYSE: TD  ) $64.6 3.7% 12.8
Royal Bank of Canada (NYSE: RY  ) $66.9 4.5% 12.2

Data in U.S. dollars. Source: S&P Capital IQ, Oct. 13, 2011.

Jim believes that investors are selling all banks indiscriminately in recent months, but that Canadian banks are very different from their American brethren. They are much better regulated, and they operate in a much less risky environment. For example, Jim notes that there are fewer incentives for homeowners to walk away from their mortgages in Canada compared with America. Ultimately, Jim feels that "Canadian banks are very stodgy" and are "perfect for conservative investors."

Canadian banks also pay generous and growing dividends. Jim sees this as a particularly attractive feature of these companies and says, "These banks just do not cut their dividends." In fact, Jim adds, "Toronto-Dominion has raised its dividend twice this year." He owns both Royal Bank of Canada and Bank of Montreal specifically for their dividend histories.

As a result of the country's carefully regulated market, Canadian banks have performed very well over the past decade, according to Morningstar. These stocks appear to offer investors attractive yields at reasonable valuations, and without too much stress. Canadians may not like it when Americans call them boring, but this seems to me to be a case where boring is better.

For additional dividend stock ideas, have a look at our special report entitled "13 High-Yielding Stocks to Buy Today." You can download it right now at no cost to you. To get instant access to the names of these 13 high-yielders, simply click here -- it's free.

John Reeves does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Citigroup and Bank of America. Motley Fool newsletter services have recommended buying shares of The Bank of Nova Scotia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 20, 2011, at 4:13 PM, havvey wrote:

    I have had some dealings with royal bank and have been happy so far.

  • Report this Comment On October 20, 2011, at 7:50 PM, begavr wrote:

    How are taxes handled on Canadian stocks when purchased in the US in a regular brokerage account?

  • Report this Comment On October 20, 2011, at 8:34 PM, jerryz11 wrote:

    Volatility is not risk. What counts is the intrinsic value of the franchise 10, 15, 20,.. years out.

  • Report this Comment On October 21, 2011, at 12:14 AM, Angelsfeartotred wrote:

    Interesting and intriguing article! Royal Bank of Canada looks too good to be true and Toronto-Dominion looks poised for growth! But if and when the banking sector collapses, they will all collapse like a house of cards, yes or no?

  • Report this Comment On October 21, 2011, at 6:41 AM, TMFBane wrote:

    @begavr, I’m clearly no expert on taxes, so I hesitate to weigh in on this. As you know, everyone has unique tax circumstances, and it matters what types of accounts we are talking about and what level of income. I did come across the following info in an article on InvestorPlace, however: U.S. investors get 15% of their Canadian dividend income withheld at the source. At tax time, however, US investors get an offsetting credit against this tax withholding in taxable accounts. So the net effect is zero for most high-income investors. Ultimately though, you should ask a tax professional about this.

    @Angelsfeartotred, I think Jim’s argument is that these banks are in much stronger positions than US banks to handle another global meltdown. My hunch is that their share prices would suffer too in another financial crisis, but that they would be strong enough to withstand the worst of it. And they’d be quicker to rebound too in a recovery. Check out this article on the relative strength of Canadian banks:

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