I have seen a number of posts recently comparing the yields of various banks to one another in an attempt to determine the “best buy”. Although, I think that the yield is important I don’t think that the yield by itself is a useful number even for those looking exclusively for dividend income. In my opinion you also need to compare the payout ratio of the banks in order to ascertain if:
1. The dividend is sustainable
2. The dividend has room to grow
3. The business has sufficient excess capital to grow
The payout ratio is a simple ratio that investors can easily calculate.
DIVIDEND PAYOUT RATIO = DIVIDENDS PER SHARE/EARNINGS PER SHARE
In tomorrows post I’ll compile both the yields, payout ratios, current PE and forward PE for the big Canadian banks and on Wednesday I’ll do the same for the big US banks.