Victoria 维多利亚, BC – Garden city of Canada (Vancouver Spring (4) April 15 2012)

The Canadian “Big 5″ Banks which include Royal Bank of Canada (RY) Toronto Dominion Bank (TD), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM) and Bank of Nova Scotia (BNS) have all had a very strong history of paying dividends. Over the years the Canadian “big 5″ banks have been very diligent in how they payout and increase their dividends.

RY: Royal Bank of Canada:

The Royal Bank of Canada has had a rich history of dividend payments. Looking back from the year 2000, Royal bank has had a steady history of dividend increases. Even during the financial crisis of 2008 into 2009, the Royal bank of Canada was able to maintain it’s dividend.

Below is a Chart of the dividend payout per year, for Royal Bank of Canada common shares.

Royal Bank 2000 – 2011

(click to enlarge)

The current dividend payment as of April 25th 2012 will be $.57 CDN per common share. The estimated dividend payout for 2012 is $2.25 CDN. Estimating Royal Bank sales at $28.12 billion, a profit margin of 25.6% and a projected profit of $7.2 billion, the bank will have an estimated EPS of $5.00. With an estimated dividend payout of $2.25 and an EPS of $5.00, the bank has payout ratio of 45%. Based on a 45% payout ratio, Royal bank should be able to maintain the dividend.

In the Royal Banks Q1 2012 earnings release (PDF under Press release) stated: “This morning, we announced a $.03 or 6% increase in our quarterly dividend,” said Gord Nixon, RBC President and CEO. “Looking ahead through 2012, we believe that we are very well positioned to continue extending our lead in Canada and building client relationships in select U.S. and international markets, while maintaining our strong capital position and strict risk and cost discipline.”

Currently the Royal Bank of Canada offers a DRIP (Dividend Reinvestment Plan). Under the current plan the bank may offer a discount from the average market price, but “at this time, the bank has decided to issue shares from treasury with no applicable discount”. (Royal Bank Investors page Dividend Reinvestment)

TD: Toronto Dominion Bank

Like the Royal Bank of Canada, the Toronto Dominion Bank also has had a rich history of dividend payments. Looking back from the year 2000, TD Bank has had a steady record of dividend increases.

Even during the financial Crisis of 2008 into 2009, TD bank was able to grow it’s dividend. In 2008 the dividend was $2.36 CDN per year while in 2009 the company paid its shareholders $2.44 CDN per year. This was an increase of .96%.

Below is a Chart of TD Banks dividend payout per year for common shares.

Toronto Dominion Bank 2000 – 2011

(click to enlarge)

In Q1 2012 TD Bank announced a dividend increase of 5.6%. The current dividend payment as of April 30th, 2012 will be $.72 CDN. The estimated dividend payout for 2012 is $2.85. Estimating TD Banks sales at $23.81 billion, a profit margin of 26.2% and a projected profit of $6.23 billion, the bank will have an estimated EPS of $6.90. With an expected dividend payout of $2.85 and an EPS of $6.90, the bank will have payout ratio of 41.3%. Based on a 41.3% payout ratio, TD bank should be able to maintain the dividend.

Holders of TD common shares have the option to participate in TD’s Dividend Reinvestment Plan (the “Plan”). Under TD’s current plan TD may offer a discount. TD bank explains: “The common shares will be purchased either at the market price on the open market or at the Average Market Price when purchased from the treasury of TD. There may also be a discount of up to 5% to the Average Market Price if TD issues the common shares from treasury. TD will announce by way of press release and in dividend announcements whether common shares purchased under the Plan will be purchased on the open market or from treasury, and any applicable discount if shares are issued from treasury.”

For more information on TD bank view my article: Strong Earning and Controlled Costs will Keep Margins Strong in 2012.

CIBC: Canadian Imperial Bank of Commerce

CIBC is proud to state on their dividend payment history page: “CIBC has not missed a regular dividend since its first dividend payment in 1868.”

Looking back to 2000, The Canadian Imperial Bank of Commerce has been able to grow or maintain their common shares dividend. Even during the financial crisis in 2008 – 2009, CIBC was able to maintain its dividend. In 2011 CIBC raised their dividend by .98% to $3.54 per common share.

Canadian Imperial Bank of Commerce 2000 – 2011

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The current dividend payment as of April 28th 2012 for CIBC will be $.90 CDN per common share. The estimated dividend payout for 2012 is $3.60 CDN. Estimating CIBC Banks sales at $12 billion, a profit margin of 26.44% and a projected profit of $3.17 billion, the bank will have an estimated EPS of $7.34. With an expected dividend payout of $3.60 and an EPS of $7.34, the bank has a payout ratio of 49%. Based on a 49% payout ratio, CIBC should be able to maintain the dividend.

Holders of CIBC common shares have the option to participate in CIBC’s Dividend Reinvestment Plan (the “plan”). Recently CIBC has made some changes to their “dividend reinvestment plan” CIBC states: (PDF Under Changes to CIBC shareholder reinvestment plan) “On March 8, 2012, CIBC announced that common shares of CIBC purchased under the Plan with reinvested dividends will be purchased at the Average Market Price (as defined in the Plan) of the shares without further discount. Previously, shares issued under the “Dividend Reinvestment Option” or “Stock Dividend Option” portions of the Plan were issued at a 2% discount to the Average Market Price.”

For More information on CIBC view my article: Margins To Remain Healthy Inspite of Economic Uncertainty.

BMO: Bank of Montreal

BMO bank like the other “big 5″ Canadian banks also has a rich history of dividend payments. Looking from the year 2000, BMO Bank has had a steady history of dividend increases. Even during the financial Crisis of 2008 into 2009, BMO bank was able to maintain it’s dividend.

Below is a Chart of BMOs dividend payout per year for common shares.

Bank of Montreal 2000 – 2011

(click to enlarge)

The current dividend payment as of February 1st 2012 for BMO was $.70 CDN per common share. The estimated dividend payout for 2012 is $2.80 CDN. Estimating the Bank of Montreal sales at $15.63 billion, a profit margin of 26.7% and a projected profit of $4.17 billion, the bank will have an estimated EPS of $6.51. With an expected dividend payout of $2.80 and an EPS of $6.51, the bank has a payout ratio of 43%. Based on a 43% payout ratio, BMO should be able to maintain the dividend.

The Bank of Montreal dividend pages states:”Dividends are generally increased in line with long-term trends in earnings per share growth, while sufficient profits are retained to support anticipated business growth, fund strategic investments and provide continued support for depositors. BMO’s policy is to maintain a dividend payout ratio of 45% to 55%, over time.”

Holders of BMO’s common shares have the option to participate in BMO’s Dividend Reinvestment Plan (the “plan”). Currently the Bank of Montreal offers a 2% discount from the average market price. BMO states: The Bank of Montreal Shareholder Dividend Reinvestment and Share Purchase Plan (the “Plan”) permits the reinvestment of a shareholder’s cash dividends to purchase additional common shares of Bank of Montreal (the “Bank”). The purchase price of such common shares, if purchased on the open market, will be based on the average of the actual cost incurred by the Agent to purchase such common shares and, if purchased from the Bank, will be based on the Average Market Price, being the average of the closing prices for a board lot of the Bank’s common shares on the Toronto Stock Exchange on the five trading days on which at least a board lot of the Bank’s common shares was traded immediately preceding the Investment Period (as defined in the Plan).

There may also be a discount of up to 5% from such Average Market Price if the Bank issues new common shares from its treasury.

At this time, the Bank has decided to issue shares from treasury at a 2% discount from the Average Market Price (as defined in the Plan) until such time as the Bank elects otherwise”.

To get more information on the Bank of Montreal please view my article: Well Postitioned For Future Profits.

BNS: Bank of Nova Scotia

The Bank of Nova Scotia has as also been proud of their dividend history. In Scotiabanks Philosophy for dividends they state:

“Scotiabank’s practice has been to relate dividends to the trend earnings, while ensuring that capital levels are sufficient for both growth and depositor protection.

This practice, coupled with the Bank’s strong earnings growth, has led to dividend increases in 35 of the last 40 years – one of the most consistent records for dividend growth among major Canadian corporations.”

Looking at the years 2000 to 2011, Scotiabank has had the most up and down dividend payments of the “big 5″ banks. In 2004 and 2005 the bank reduced it’s dividend payout, but during the financial crisis in 2008 into 2009, the bank raised it’s dividend from $1.92 to $1.96 a 2% increase.

Below is a Chart of the dividend payout per year for common shares.

Bank of Nova Scotia 2000 – 2011

(click to enlarge)

In Q1 2012, the bank of Nova Scotia announced a dividend increase of 5.5%. The current dividend payment as of April 30th, 2012 will be $.55 CDN. The estimated dividend payout for 2012 is $2.17. Estimating BNS Banks sales at $18.91 billion, a profit margin of 30.83% and a projected profit of $5.83 billion, the bank will have an estimated EPS of $4.90. With an estimated dividend payout of $2.17 and an EPS of $4.90, the bank will have a payout ratio of 44.2%. Based on a 44.2% payout ratio, the Bank of Nova Scotia should be able to maintain the dividend.

Holders of the Bank of Nova Scotia common shares have the option to participate in BNS’s dividend reinvestment plan (the “plan”). Currently the plan states that shareholders in the dividend reinvestment plan will receive a 2% discount on their shares.

Scotiabank states: (PDF under Shareholder Dividend & Share Purchase Plan) “On August 26, 2008, the Bank announced that participants in the Plan will receive a two per cent discount from the Average Market Price (as defined in the Plan) on the purchase of additional common shares with reinvested dividends. The discount will not apply to the purchase of common shares with the optional cash payment or interest reinvestment options of the Plan. The first dividends for which this discount will be effective are the dividends on the Bank’s common and preferred shares declared by the Board of Directors on August 26, 2008 for the quarter ending October 31, 2008. These dividends will be payable on October 29, 2008 to holders of record at the close of business on October 7, 2008. Prior to this announcement, common shares issued under the Plan have been issued with no discount to the Average Market Price (as defined in the Plan).

Based off of the forward looking EPS, all the Canadian banks have a payout ratio less than 50%.

1. Royal Bank of Canada = 45%

2. Toronto Dominion Bank = 41.3%

3. Canadian Imperial Bank of Commerce = 49%

4. Bank of Montreal = 43%

5. Bank of Nova Scotia = 42.2%

With all of the banks having payout ratios under 50% in 2012, all of the banks look like they will be able to maintain their current dividends and in some cases increase them going forward into 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Last week, I hit the 100-share level in Intel (INTC) and the 400-share marker in Wendy’s (WEN). Both stocks pay a dividend. INTC comes in at $0.21 per quarter, while WEN offers a modest $0.02 every three months.

If things stay as they are (INTC’s should increase, while WEN’s is less stable), I will earn roughly $84 a year on my INTC shares and $32 annually on my WEN shares. Both numbers will move slightly higher for several reasons: I own just over the listed amounts, I continue to add to both positions on a weekly- to bi-weekly basis and dividend reinvestment throughout the course of the year will also help take my totals higher.

Today, I topped the 200-share threshold in Pandora (P). That stock does not pay a dividend, nor do I expect it to or want it to.

It has not taken me very long at all to reach these levels. As long as nothing changes materially in my life or in the stories of these companies I intend to stay the course and amass even larger positions. The ultimate goal here is to realize the rewards that come alongside regularly-scheduled investments in a small stable of stocks, ranging from large-cap dividend-payers, turnaround stories in the making and hyper-growth Internet stocks.

Dividends operate on auto-pilot. As companies and your investments grow, the income you can collect and/or reinvest continues to rise. It’s a beautiful thing watching it happen, particularly on larger and more mature positions. While nothing beats the ability to buy more shares on a regular basis, dividend reinvestment does the trick remarkably well.

Covered call income does not run on auto-pilot. It’s a very active strategy. It’s a strategy that I employ often and would love to use in association with these three positions. I wonder, however, if it makes much sense to start writing covered calls on these stocks until I own more shares.

Transaction costs always matter. While I do not mind the $30-$40 I pay to Sharebuilder each month to build positions (I have yet to find a better deal outside of some DRIPs, when available), the options commissions at almost every reputable retail brokerage are off the charts.

Consider this. The INTC $29 call brings in, as of this writing, $0.25. That does not sound like much, however, if I do that five times in a year, that’s an additional $125 and an additional three shares or so of INTC if I reinvest that money. That beats the dividend I stand to collect and helps enhance the power of my position.

Here’s the deal, though. If I write that call right now in my Sharebuilder account, the commission totals $8.70. That brings my net covered call income to $16.30. While I would not do this on WEN because I do not want to lose my shares, I could write four WEN April $5 calls and bring in $0.40 total. It would cost me $10.95 to put on the trade, bringing my net income to $29.05. With P, the April $11 call smells pretty to me at the moment. I could write two of them against my shares and take in $0.30, but, after commission, I am left with $20.55.

I keep asking myself if it’s worth putting my shares on the line when I am giving so much money to the middleman. Now, let me be clear, I love Sharebuilder. This is not a knock on them. I could transfer these positions to any number of other firms and, at most of them, the commission either trends higher, is the same, or is not low enough to justify the switch, particularly if I intend to continue dollar-cost-averaging, which I do.

I sit at a bit of a crossroads. On INTC, if I could collect $16.30, after commissions, five times a month, that’s $81.50. Almost equal to another dividend on 100 shares. That sounds pretty good put that way, but, as always, Seeking Alpha readers help me flesh out my thought process. So, please, be my guest in the comments.

You do not run into quite the same problem with a stock like Apple (AAPL). If I own 100 shares and write the April $650 call, I generate $6.70 in income. I have no qualms whatsoever over giving a brokerage $8.70 out of $670. I would do that all year long, which is why, if I still owned AAPL shares, I would never have asked for a pesky dividend. The covered call income, even after transaction costs, you can write for yourself ends up dwarfing the dividend.

That’s not the case with lower-priced stocks. The commission stays the same regardless of the price of the option contract. I am leaning towards writing some calls on INTC and P. Initially, I thought that it’s not worth the time and expense, however that’s also what some folks think when they buy their first 3.3531 shares of a stock. Covered call income, even after the fees, adds up fast, just like your number of shares, which reinvested covered call income can help jump start.

There’s no question in my mind that dividends are better than covered calls, in many, though not all, cases, plus they’re free … but wait … I forgot about taxes. I think I will wait until after April 15th (or whatever it is this year) before I factor that headache into the equation.
April 3, 2012

Bank stocks rallied after the stress tests were released earlier this month. However, fellow Fool Morgan Housel points out that there’s a major flaw with forward-looking stress tests — they’re only as good as the assumptions used. I agree.

Is it wise for banks to reduce their capital now, as economic uncertainty still engulfs the world? Maybe not.

Testing times
The Federal Reserve tried to ascertain whether banks had enough capital to survive in an environment where the unemployment rate would rise to 13%, housing prices would drop by 20%, and stock prices would fall by 60%. The scenario is quite bleak, but it overlooks potential legal liabilities from the mortgage crisis that banks have to face, the effect of possible interest-rate increases, and, if circumstances demand, from where and how they would borrow money.

I’m unimpressed with either the assumptions or the results of the tests. I don’t think giving these banks a green light to boost dividends to the tune of $3.9 billion and undertake share repurchases worth a staggering $27 billion really qualify as positive moves.

Who’s giving what
The biggest U.S. lender, JPMorgan Chase (NYSE: JPM ) , has announced buybacks worth $15 billion through the first quarter of 2013, subject to regulatory approval. Wells Fargo (NYSE: WFC ) raised dividends by an amazing 83%. US Bancorp (NYSE: USB ) increased its annual dividend by 56% and authorized a brand-new 100 million-share repurchase program. Most of the banks were in a rush to increase dividends and gain investors’ confidence. But some didn’t, while there were a few that couldn’t.

Bank of America (NYSE: BAC ) , the second largest U.S. lender, which saw its loan-loss estimates adjusted by the Fed, had its shares soar to their highest level in nearly seven months. The Fed also confirmed that the ailing bank has definitely improved when it comes to strengthening capital. But the bank has chosen not to jump on to the bandwagon and raise dividends, or to go ahead with stock repurchases — for now. On the other hand, the Fed rejected Citigroup’s (NYSE: C ) capital plans and offer to raise dividends, as it failed to make the cut.

Is all well?
The economy is still sluggish, and conditions in Europe aren’t great. Most of the banks that passed the test have significant European assets that might turn the delicate balance they’ve managed. So we aren’t completely out of the woods yet. Fellow Fool Ilan Moscovitz thinks the tests were centered on solvency and don’t provide any assurance that there won’t be another financial crisis.

The point Morgan raised regarding the round of tests worries me, as it’s true that every recession is different from the previous one. While this round of stress tests was, well, stressful, it was limited, as it assumed the next recession would be no different from the current one. There are many factors that the Fed misses completely, including the student-loan bubble, rising oil prices, the European debt crisis, and so on. These conditions need to be factored into the equation. Most banks also continue to be significantly levered, and ratios have been aggressively managed using a host of accounting moves.

For a change, offering no dividends works
So while higher dividends and more repurchases are signs of a healthy company, lower equity suggests that banks have less of a cushion if things were to take a turn for the worse again. It’s good to see these behemoths perform well under this round of stress tests, but it doesn’t tell us much about their operating and growth capabilities in a virtually zero-interest-rate environment.

Is it, then, a wise decision for the Fed to allow banks reduce their capital (in the form of increased buybacks and dividends) in the face of economic uncertainty? What say you? Leave your comments below.

But if these too-big-to-fail behemoths are not for you, don’t worry. Fellow Fool Anand Chokkavelu highlights one name that looks like the kind of bank Warren Buffett might have bought in his earlier years in “The Stocks Only the Smartest Investors Are Buying.” I invite you to download this special report for free.

By Shubh Datta | More Articles
March 31, 2012 | Comments (4)