Why I’m buying more of this dividend-growing bank

Open this photo in gallery:

I’ve accumulated more than $1,000 of cash in my model Yield Hog Dividend Growth Portfolio. Now, it’s time to go shopping.

Before I announce how I’ll be reinvesting my cash, however, I’ll provide a quick update on the model portfolio’s performance.

As of May 31, the portfolio’s value had grown to $116,828.88, for a total return – including dividends – of 16.8 per cent since I launched the portfolio with $100,000 of virtual cash on Sept. 30, 2017. For comparison, the S&P/TSX Composite Index posted a total return – also including dividends – of 7.9 per cent over the same period.

Beating the index is nice. But, in keeping with the “dividend growth” part of the portfolio’s name, I also keep a close eye on its growing income.

I’m pleased to report that, in May, three additional companies – A&W Revenue Royalties Income Fund (AW.UN), Algonquin Power & Utilities Corp. (AQN) and Bank of Montreal (BMO) – announced dividend increases. This brings to 13 the number of model portfolio stocks that have hiked their payments since the start of 2019. And I’ll bet you a Teen Burger and onion rings that there will be several more increases announced before the year is over.

The beauty of dividend growth investing is that, no matter what the stock market throws at investors, lots of solid, blue-chip companies continue to raise their dividends. My portfolio is now generating income of $5,012 on an annualized basis, up 22.4 per cent from $4,094 at the portfolio’s inception. This increase reflects not just dividend increases, but regular dividend reinvestments and a falling Canadian dollar. Four of the portfolio’s holdings – Algonquin, Brookfield Infrastructure Partners LP (BIP.UN), Restaurant Brands International Inc. (QSR) and the iShares Core Dividend Growth ETF (DGRO) – declare dividends in U.S. dollars, and a weaker loonie boosts the value of those dividends when converted into Canadian currency.

Now, what to do with the money that’s been piling up?

After a mixed earnings season, shares of Canadian bank stocks have stumbled recently. I own four of the Big Five in my model portfolio, and I’ve decided to take advantage of the recent weakness by acquiring an additional 10 shares of Bank of Montreal. (I placed the "order” on Monday, so the 10 shares will cost me $983.80 based on that day’s closing price of $98.38. In a recent column https://tgam.ca/2wzJuxh, I explained how the Globe records stock purchases and sales in the model portfolio.)

Even though BMO’s stock fell nearly 5 per cent in the three days after its second-quarter earnings release, the results were hardly a disaster. Although adjusted earnings per share came in a few pennies less than expectations, if one excludes certain one-time items the adjusted results were actually better than expected, RBC Dominion Securities analyst Darko Mihelic said in a note: “Q2 had some puts and takes but net-net it was a good quarter,” Mr. Mihelic said. He reiterated an “outperform” rating and $113 price target on the shares, which closed Tuesday at $99.83 on the Toronto Stock Exchange.

Odlum Brown also rates the shares a buy, with a price target of $112, citing BMO’s strong commercial banking operation, solid and growing presence in the U.S. Midwest and opportunities to improve profitability by cutting costs and increasing scale in certain business lines. Yet the stock still trades at an attractive multiple of a little more than 10 times estimated 2019 earnings.

“This is well below historical averages, and not in line with BMO’s growth runway – for perspective, the company believes it can grow earnings per share by 7 to 10 per cent over the medium term,” Odlum Brown analyst Benjamin Sinclair said in a note.

Finally, the fact that BMO also raised its dividend is yet another reason to like the stock. The 3-per-cent increase, announced along with the quarterly results, raised BMO’s dividend to $1.03 a quarter or $4.12 annually. That provides a yield of about 4.1 per cent, which is attractive – especially considering the bank’s long history of raising its dividend (with occasional interruptions when the economy hits a pothole).

I don’t know what BMO’s stock will do in the short run. But over the long run, I expect that it will continue to reward investors with a rising share price and a growing dividend.