Bank of Montreal (USA) vs. Bank of New York Mellon Corporation: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two North American banks known for their strong dividend payouts will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Established in 1817, Bank of Montreal (USA) (BMO -1.04%), or BMO, is one of the largest and oldest banks in Canada. It provides retail banking, wealth management, and investment banking products and services. Headquartered in Montreal (as you might expect), BMO currently serves over 12 million personal, commercial, corporate, and institutional customers around the world. The company has approximately 45,500 employees working in more than 1,570 branches in Canada and the United States. In 2011, BMO completed the acquisition of Marshall & Ilsley and merged with Harris Bank to form BMO Harris Bank in the United States.

Founded in 1784, Bank of New York Mellon (BK 0.89%), commonly referred to as BNY Mellon, is the oldest banking corporation in the United States. BNY Mellon eschews retail banking and only offers investment management and investment services to corporations, institutions, and individual investors through a presence on six continents, 35 countries, and over 100 markets. Headquartered in Manhattan, BNY Mellon has more than $27 trillion in assets under custody and administration, and $1.6 trillion in assets under management. It employs approximately 51,100 people worldwide.

Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
Bank of Montreal has paid uninterrupted dividends for more than 185 consecutive years since its first distribution in 1829, sustaining payouts through two world wars, the Great Depression, numerous economic crises, and dozens of asset bubbles. However, BMO's 185-year streak can't hold a candle to BNY Mellon, which has never stopped paying dividends since its first distribution in 1785, according to U.S. News & World Report. This battle of dividend Methuselahs may never be matched by any other pair of public companies in the world, but BNY Mellon takes this point with a two century-plus payout streak.

Winner: Bank of New York Mellon, 1-0.

Round two: stability (dividend-raising streak)
According to Dividata, Bank of Montreal has increased its shareholder distributions at least once each year since 1995, which gives it a 19-year streak of dividend growth. That's an easy win for BMO, as BNY Mellon has only been raising its dividends since 2013 after holding payments at a reduced level for several years following the financial crisis.

Winner: Bank of Montreal, 1-1.

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision making. Have our two companies sustained strong yields over time? Let's take a look:

BMO Dividend Yield (TTM) data by YCharts.

Winner: Bank of Montreal, 2-1.

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.

BMO Dividend data by YCharts.

Winner: Bank of New York Mellon, 2-2.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

BMO Cash Dividend Payout Ratio (TTM) data by YCharts.

Winner: Bank of Montreal, 3-2.

Bonus round: opportunities and threats
Bank of Montreal may have won the best of five on the basis of its history, but investors should never make their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Bank of Montreal opportunities:

• Bank of Montreal has gained traction due to its strength in wealth management and retail banking.
• BMO cut approximately 1,000 jobs in an effort to reduce operational expenses.
• BMO's common-equity ratio under Basel 3 standards exceeds that of fellow Canuck banks TD Bank and Bank of Nova Scotia.

Bank of New York Mellon opportunities:

• BNY can relax now that Bank of America's $8.5 billion settlement with institutional investors has been upheld.
• BNY Mellon initiated a $1.74 billion stock buyback program to begin in the second quarter.
• Sweden's AP7 hired BNY Mellon to provide custody and collateral services for $28.8 billion in assets.
• BNY Mellon should benefit more than most banks if the Federal Reserve boosts interest rates next year.
• BNY Mellon plans to expand its hedge fund business by buying out service provider HedgeMark.

Bank of Montreal threats:

• The Federal Reserve could make it harder for large foreign banks to operate in the U.S.
• Canada's central bank has signaled that it will keep interest rates low longer than the U.S. Federal Reserve will.
• Weakness in Canada's economy could wreck Bank of Montreal's progress.

Bank of New York Mellon threats:

• The New York Fed has threatened new regulations that could hurt BNY's clearinghouse operations.
• A U.S. bankruptcy court ordered BNY to return $337 million to Sentinel Management.

One dividend to rule them all
In this writer's humble opinion, it seems that Bank of Montreal has a better shot at long-term outperformance, due to its broader geographical and operational presence, which has thus far benefited from a strong Canadian economy.

However, the profitability of BMO's U.S. operations could be imperiled by new regulations proposed by the Federal Reserve. Low interest rates and signs of a slumping Canadian economy could also hurt BMO's future growth. On the other hand, BNY Mellon is relatively insulated against both of these threats, and the bank's ongoing expansion into hedge fund services should also strengthen its competitive position in global investment markets. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below.

No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!