The bright side of bank service-fee hikes has always been that some of the money gets passed to shareholders through dividend increases.
But while the banks have been actively jacking up fees and certain borrowing costs in the past several years, they've slowed the pace of dividend increases considerably. Some banks barely register as dividend growth stocks any more.
Dividend growth is an ideal investing approach for these uncertain times. One way a company has of demonstrating its strength is by increasing its quarterly cash payouts to shareholders at least once a year. Rising dividends make a company attractive to investors and thus support rising share prices. You also get a hedge against inflation when dividends rise year over year.
Banks used to be a no-brainer choice for dividend growth, and some are still a good option. But as a group, their reputation may exceed reality. If you're heavily weighting financials in a dividend-focused portfolio, reconsider.
In a sense, investors should be grateful for the dividend policies used by the big banks. While several American banks cut or suspended dividends during the financial crisis, our banks held firm. But the cost of holding the line on dividends was a multiyear period of zero dividend growth, followed by a subdued resumption of dividend hikes.
A comparison of dividend growth rates for the Big Six banks from 2008 through 2012 shows an average increase of just 2.6 per cent. For the 2004-08 period, the comparable growth rate was 11.7 per cent.
These averages obscure two interesting stories about bank dividend growth. The first is that all of the Big Six showed strong rates of dividend growth in the 2004-08 period. Royal Bank of Canada led the group with an annualized increase of 14.6 per cent, while Canadian Imperial Bank of Commerce trailed at 9.6 per cent.
Today, bank stocks can be divided into two groups – dividend duds and dividend studs. The duds are Bank of Montreal and CIBC, and the outright stud is Toronto-Dominion Bank. RBC and Bank of Nova Scotia seem to have accelerated their dividend growth lately, so let's provisionally add them to the stud list as well.
National Bank of Canada was a very solid dividend growth stock over the past five years, but hasn't ramped its payments up as much as some others lately. But let's call it a stud for now.
Dividend growth is a long-term support for a company's share price, but BMO shows the two aren't always connected. In fact, BMO is the top-performing bank stock this year with a gain of 3.7 per cent for the year to April 11, and its 12-month gain of 8.4 per cent is a close second to RBC. Don't look to BMO for rich dividend increases, though. The bank most recently paid just 2 cents a quarter more in dividends than it did in the 2008-12 period, although it has announced an increase of another two cents for dividend to be paid at the end of May.
An elite dividend-growth bank increases its quarterly cash payout twice per fiscal year, and that's exactly what National Bank, RBC, Scotiabank and TD have done in the past year at least. CIBC has been on a one-increase-a-year plan since 2011.
If we annualize the latest dividends either paid or announced by all of the banks this fiscal year, TD, RBC and Scotiabank look to be gaining the most dividend growth momentum. Each is on track to pay roughly 8- to 10-per-cent more than last year, a big improvement over the average growth rate of the past five years.
The sustainability of dividend increases like this is uncertain, though. Growth in new borrowing through mortgages, credit lines and credit cards has fallen sharply in recent months, and that could have a negative impact on growth in bank profits and, in turn, dividend increases.
Financial stocks account for one-third of the S&P/TSX composite index right now, which makes them the most dominant sector by far.
But that's an excessive weighting if you prize dividend growth above all. In the S&P/TSX Canadian Dividend Aristocrats Index, which is built using dividend growth and other factors, financials account for just 20.5 per cent of the assets.
In the prefinancial crisis days, owning all or any of the banks made sense on a dividend growth basis. If you still like that approach, consider the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB), which, as its name suggests, holds similar weightings in each of the Big Six banks. Monthly payouts from this fund over the past couple of years indicate that you do benefit when banks increase their dividends. However, the management expense ratio for this ETF is pricey at 0.62 per cent.
Investors seeking top dividend growth stocks won't want to own all the banks, however. What's available as a bank alternative if you want dividend growth? Stocks as varied as Tim Hortons, Suncor Energy, Enbridge, BCE Inc. and Canadian National Railway have a higher annual average rate of dividend increases than any of the banks.
There's one notably unpromising sector for dividend growth – non-bank financials, such as insurance companies and mutual fund firms.
Sun Life Financial, once a dividend growth star, hasn't boosted its quarterly payout since mid-2008.
And then there's Manulife Financial, a onetime dividend growth machine that now pays a dividend at half the rate it did back in 2009.
All the banks are better dividend growth choices than these examples, even if they're not what they once were.
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For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).
Editor's Note: An earlier version of this column noted that Bank of Montreal's quarterly dividend is 2 cents higher than it was through the past five years. This information did not include a dividend increase of an additional 2 cents that will be paid at the end of May. This increase suggests BMO's annual dividend could be $2.94 this fiscal year, which would be a 5 per cent increase over the previous year. These numbers are slightly higher than what was reported originally.
Rob Carrick