Bank of America has a dividend yield of 3%. That's toward the high end of the yield range over the past decade, but investors looking for a high-yield bank stock can do better. A quick look to the north and you'll find that Bank of Montreal (BMO -0.77%) is offering 4.6% as of this writing, Toronto-Dominion Bank (TD 0.46%) 5%, and Bank of Nova Scotia (BNS 0.71%) 6.9%. Here are some key facts you need to know about this trio of high-yield bank stocks.
Canada is hard on its banks
One of the most important differentiation points between a U.S. bank like Bank of America and Canadian banks like Bank of Montreal, TD Bank, and Scotiabank, is found on the regulatory front. Regulations in the U.S. simply aren't as strict, leading to excesses that can be fairly damaging to dividend investors. That was particularly clear during the Great Recession, when Bank of America, and many of its peers, cut their dividends in the face of economic hardship.
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None of the three Canadian banks named here cut their dividends. That said, taking a predictably cautious stance, regulators in Canada stopped the country's banks from increasing dividends until the fear of a broader economic collapse had subsided. That's how Canadian banking regulators roll, if you will. There's another factor here, though, because regulators in the country have also prevented merger and acquisition activity in such a way that it has left the industry's largest players with entrenched market positions. Bank of Montreal, TD Bank, and Scotiabank are among the largest banks in Canada and it is highly likely that this isn't going to change.
So all three of these Canadian banking giants have solid foundations. They are looking to grow by investing in foreign countries. Bank of Montreal and TD Bank are focused on expanding in the U.S. market while Scotiabank is more active in Central and South America, with a lesser focus on the United States. Basically a core and explore model, but this is why their yields are high today, all of them near the highest levels of the past decade.
TD Dividend Yield data by YCharts
But how are the companies doing? Are the falling stock prices that have helped increase yield a major worry?
Bank of Montreal's bad timing
Bank of Montreal bought Bank of the West on Feb. 1, 2023. That's an important date because just shortly after that point, there were a series of bank runs on regional banks like Signature Bank and Silicon Valley Bank. The big problem was that the value of the bonds these banks held on their balance sheets at face value (delineated as assets that would be held to maturity) had declined because of rising interest rates.
When customers withdrew money en masse, those bonds had to be sold and then material losses had to be recorded. Bank of Montreal is not experiencing a bank run and is not at risk of failing, but it did end up buying a bank that was in a weaker financial state then it expected when it inked the deal. Investors are downbeat on the stock because Bank of the West probably isn't going to be the growth engine that was expected. But there's no reason to believe that this acquisition will derail Bank of Montreal permanently or stop it from continuing to support its fat dividend.
Toronto-Dominion flubs the test
Perhaps ironically, TD Bank's stock has been hobbled by the fact that its proposed acquisition of regional bank First Horizon Bank (NYSE: FHN) got canceled. While avoiding this purchase allowed TD Bank to sidestep the issues that hit Bank of Montreal, the reason for the deal being scuttled is the problem.
U.S. regulators are unhappy with TD Bank's internal controls surrounding money laundering. There's likely to be a fine and until the issue is resolved, TD Bank probably won't be allowed to buy any U.S. banks. TD Bank will muddle through this in time, so the high yield is probably a buying opportunity. And this doesn't stop the bank from opening its own branches, so growth hasn't come to a screeching halt.
Bank of Nova Scotia is refocusing on its best businesses
With relatively little U.S. exposure, Scotiabank sailed through the U.S. banking upheaval in relative stride. But Central and South America are hardly low-risk regions, so there's a good reason for the higher yield here. The stock is down 20% over the past decade.
The bank has openly admitted that it needs to do a better job with its business, as it lags peers on many key business metrics. The bank is working on the issues, announcing a plan to improve performance in late 2023. Still, investors aren't happy about the laggard performance. The company's payout ratio is also above its target range right now, another negative. So there are things to worry about.
But management has been very clear that it is not worried about the safety of the dividend. If you can stomach a little uncertainty while the company refocuses its business, the ultra-high yield on offer could be worth a deep dive.
The Canadian economy is a worry, too
There's one last issue that investors need to keep in mind. The Canadian economy and the U.S. economy do not always move in the same direction. There are currently concerns about Canadian consumers in the face of a rising interest rate environment. This is largely driven by the housing market in the country, which has for years been on an upward climb. It is a risk that U.S. banks probably don't face to the same degree, but like the other concerns, should be something that the largest Canadian banks are able to handle in relative stride.
Think long term
There are problems facing Bank of Montreal, TD Bank, and Scotiabank. So there are reasons why investors have put these Canadian banks on the sale rack, pushing their dividend yields up to very attractive levels, historically speaking. But the problems don't appear to be insurmountable and they are likely to be relatively short-term in nature. If you can think long-term while Wall Street is fretting, now could be a great time to add these banking giants to your portfolio.
