When most U.S. investors think of banks, names like Citigroup (C 1.46%) and Bank of America (BAC -0.22%) probably come to mind first. That's understandable given their massive size and reach. But dividend investors looking to add bank stocks to their portfolios might want to consider a couple of institutions that are likely far less familiar to them: Canadian majors Bank of Montreal (BMO -0.68%) and Toronto-Dominion Bank (TD 0.41%).
High dividend yields
Bank of Montreal, aka BMO, and Toronto-Dominion Bank, or TD Bank, naturally pay their dividends in Canadian dollars. So the actual payouts U.S. investors receive will fluctuate based on currency exchange rates. And there are Canadian taxes that have to be paid on those dividends, though at least a portion (and in some cases, all) of those can be recouped via U.S. tax credits come April 15. That said, both of these institutions offer higher yields than many of their U.S. counterparts.
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For example, at its current share price, Bank of America's yield is 2.5% while BMO and TD Bank both yield around 4.2%. And while Citigroup's yield is closer to this pair -- roughly 4% at recent share prices -- it still isn't quite as generous. All four of these banks, meanwhile, have large businesses supported by dominant positions in their home markets.
Incredible commitment to shareholders
Another factor worth considering here is that TD Bank has been paying dividends for a remarkable 164 consecutive years. BMO's track record is even better, topping all Canadian companies with a dividend-paying history spanning 193 years. True, the banks have not increased their payouts every year over those spans. In fact, Canadian regulators blocked them from boosting their dividends during the Great Recession (more on this in a second). Still, the general trend lately has been higher.
Compare that to Citigroup and Bank of America, which both slashed their dividends to a token $0.01 a share during the 2007-to-2009 economic downturn. While they still paid dividends, those cuts were tantamount to an elimination. The penny-per-quarter payouts were basically only intended to allow institutional investors that have dividend mandates for their portfolio holdings to remain shareholders.
Conservative by design
The fact that Citigroup and Bank of America had to so drastically reduce their dividends while BMO and TD Bank were able to hold theirs steady during such a difficult financial period speaks to the conservative nature of Canadian banks. While a degree of conservativeness is effectively built into the business model, Canadian banks are compelled by regulators to be even more cautious. At this point, leading players like BMO and TD Bank basically have entrenched positions in their home market and are unlikely to be unseated by upstarts or competitors. That suggests that they may have limited growth opportunities. However, if you're looking for a safety-first investment, that probably won't bother you.
Meanwhile, investors should note that BMO and TD Bank are focused on defense. That's because there is a real risk of a global recession in part due to the efforts being made to tame rampant inflation. At the end of the second quarter, BMO's Tier 1 Capital Ratio -- a measure of a bank's ability to withstand adversity -- was the strongest out of all North American banks. TD Bank came in at No. 2. Simply put, if there's a serious recession ahead, these two banks are better positioned to deal with it than any of their North American peers.
Pursuing the growth market to their south
Do not, however, think that BMO and TD Bank are so conservative that they have no opportunities for growth. In fact, both have been working to expand in the United States. Thanks to a more lenient regulatory environment in the U.S. market, each of these Canadian banks has been able to make acquisitions to fuel growth. Their U.S. operations are still smaller than their Canadian businesses -- BMO's U.S. arm produces around 37% of total revenue while TD Bank's U.S. banking exposure is 29%. However, the fact that growth is still a clear focus and opportunity is a positive sign for conservative investors who want a long-term bank play.
Don't get stuck in your home market
Investors everywhere tend to focus on investments from their home countries. Don't let this bias stop you from considering some of the best names in the banking sector, notably including BMO and TD Bank. They may not be the first names that come to mind when you think of banking, but they have incredibly attractive attributes. If you take the time to examine these two dedicated dividend payers, you might decide to find some space for them in your portfolio today, and happily hold them for years to come.
