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Bank towers at Toronto's Bay StreetFred Lum/The Globe and Mail

Canada's banks will soon be free to return a little more cash to shareholders who've been waiting patiently for the past two years for dividend hikes.

But investors shouldn't expect a quick return to the heady days that existed before the financial crisis, when banks regularly fattened their dividends, often by large amounts. This time around, thin gruel for shareholders is likely to be served up as the order of the day.

"They're going to raise them by a smidgeon," Darko Mihelic, an analyst at Cormark Securities Inc., said of bankers and their payouts. He cautioned that shareholders shouldn't be expecting too much because the institutions won't "suddenly blow the doors out and raise dividends aggressively."

Banks deemed most likely to lead the parade of rising payouts are National Bank of Canada, Toronto-Dominion and Bank of Nova Scotia.

The spotlight on dividends arose after a report Wednesday in The Globe and Mail that Canada's banking regulator, the Office of the Superintendent of Financial Institutions, is preparing to lift a two-year-old constraint that pushed the country's banks to preserve excess capital instead of using it to increase dividends, buy back shares or make acquisitions.

The dividend hiatus is ending because global regulators, including those from Canada, are close to announcing an agreement on the amount of capital banks will need to safeguard themselves from another blowout. The talks, known colloquially as Basel III, could wrap up as early as this weekend and are expected to set targets that will be easily met by the Canadian banks, freeing up surplus capital for dividends or other uses.



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Desjardins Securities bank analyst Michael Goldberg said in a note to clients Wednesday that the capital requirements proposed at the Basel talks will have a "positive" impact on the Canadian industry.

He compiled a ranking that showed Scotiabank, National and TD return the lowest percentage of earnings in dividends, based on forecast 2011 profits, suggesting they have the most scope for increases. The three banks will be paying about 40 per cent, compared with figures of between 45 and 50 per cent for Canadian Imperial Bank of Commerce, Bank of Montreal and Royal Bank of Canada.

Mr. Mihelic said a bank's share price might receive a temporary boost from a dividend hike, but any long-run capital gains will depend more on whether institutions use capital to boost profits and revenues through such steps as increasing their loan books. That is why the banks will have only modest increases.

"Why would you raise [dividends]aggressively given that there are other opportunities to spend your capital? So if the market is looking for large increases, I believe they're [going to be]sadly mistaken," he said.

Some dividend-oriented investors have taken the pause in hikes in stride, saying it was a modest step that helped the industry over a tough patch.

"I'd sooner have increases of course, but then at the same time you still want a safe bank, and a bank with the proper capitalization," said Tom Connolly, editor of the Connolly Report, a newsletter that expounds the virtues of investing in Canadian dividend-paying stocks.

While Mr. Connolly is a big proponent of dividend income, he remains cautious about Canadian banks, which currently sport yields ranging from a low of 3.3 per cent at TD to a juicy 4.7 per cent at both CIBC and BMO.

The high yields, along with the possibility of an increase thrown in as a sweetener, are "quite tempting," Mr. Connolly said, but he is worried that the financial crisis that pummelled banks worldwide after the collapse of Lehman Bros. in 2008 may still have another leg or two to run. There are, for example, regular jitters about European banks, and in Canada, Manulife Financial shares have been weak, suggesting problems remain in the financial sector.

Even with dividend hikes, "I'm not really gung ho to jump in completely," Mr. Connolly said.

Dividend tally

Royal Bank of Canada



Quarterly dividend per share: 50¢



Dividend yield: 3.92%



Last quarterly dividend hike: November, 2007, up 4¢ Dividend payout ratio: 58.5%



National Bank of Canada



Quarterly dividend per share: 62¢



Dividend yield: 4.02%



Last quarterly dividend hike: February, 2008, up 2¢



Dividend payout ratio: 39.4%



Bank of Nova Scotia



Quarterly dividend per share: 49¢



Dividend yield: 3.82%



Last quarterly dividend hike: July, 2008, up 2¢ Dividend payout ratio: 49.5%



Canadian Imperial Bank of Commerce



Quarterly dividend per share: 87¢



Dividend yield: 4.8%



Last quarterly dividend hike: October, 2007, up 10¢ Dividend payout ratio: 52.3%



Toronto-Dominion Bank



Quarterly dividend per share: 61¢



Dividend yield: 3.38%



Last quarterly dividend hike: October, 2008, up 2¢



Dividend payout ratio: 41.3% (forecast)



Bank of Montreal



Quarterly dividend per share: 70¢



Dividend yield: 4.75%



Last quarterly dividend hike: August, 2007, up 2¢



Dividend payout ratio: 61.3%



Source: Bloomberg, Macquarie Securities

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