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The big banks in Canada have created significant wealth for long-term investors by a combination of dividend growth and capital gains. Compared to their peers south of the border, TSX banks have a conservative approach to lending, allowing the latter to thrive across market cycles.
For instance, while U.S. banks were forced to cut dividends during the financial crisis in 2008, each of the six big Canadian banks could maintain these payouts due to their strong liquidity positions.
Further, the Canadian banking sector is highly regulated, enabling market leaders to benefit from entrenched positions and a wide competitive moat.
Despite their market-beating gains, most bank stocks have underperformed the broader markets in the last two years, as investors are worried about rising interest rates leading to a tepid lending environment and lower profit margins.
However, the pullback has resulted in higher dividend yields for TSX bank stocks, making them attractive to income-seeking investors.
Given these factors, let’s see if you should invest in Bank of Montreal (TSX:BMO) stock for its 5.2% dividend yield right now.
Is BMO stock a good dividend stock?
Established in 1817, BMO is the eighth-largest bank in North America in terms of total assets. A diversified financial services company, BMO’s business segments include personal & commercial banking, wealth management, and capital markets.
Its premium commercial banking franchise commands a top-four market position in North America, while the personal banking business enjoys a strong deposit base and growing market share. BMO also has a high-margin wealth business and a competitive capital markets franchise positioned for growth in the upcoming decade.
It is among the top 10 banks in the U.S., with a presence in key growth markets. Further, BMO’s well-capitalized balance sheet and strong credit ratings allow it to pay shareholders an annual dividend of $6.04 per share, indicating a yield of almost 5.2%.
In fact, BMO has the longest running dividend streak for any company in Canada, maintaining a payout for close to 200 years. In the last 27 years, BMO stock has raised dividends by 8.2% annually, which is exceptional for a cyclical company.
What is the target price for BMO stock?
BMO aims to increase adjusted earnings between 7% and 10% in the medium term. Despite narrowing profit margins in fiscal 2023 (ended in October), its earnings grew by 9.9% in the last five years, and the company increased dividends by 6% year over year in 2023.
With $1.29 trillion in total assets, $910 billion in total deposits, and $668 billion in gross loans and acceptances, BMO ended fiscal 2023 with a common equity tier-one capital ratio of 12.5%, which is higher than the regulatory requirement of 11.5%. Its liquidity coverage ratio also stands at 128%, above the 100% requirement.
Priced at 9.8 times forward earnings, BMO stock is quite cheap, given its tasty dividend yield and earnings forecast. Analysts remain bullish on the TSX bank stock and expect shares to surge over 8%, given consensus price target estimates. After accounting for its dividend yield, total returns will be closer to 13%.
BMO stock has returned over 400% to shareholders in dividend-adjusted gains since December 2003. In this period, the TSX index has gained 365%.