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.
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I think there is something at play here that most people fail to mention about yields. Sometimes the reason for stock having a lower yield than a competitor has more to do with the recent performance of its share price compared to that competitor. For example compare RY to BMO. Does BMOs yield mean its a better buy? Maybe? But it also means that RY have been able to grow earnings quicker, and hence attract more buyers that lifted the stock price causing the yield to drop. Is this likely to continue? Its a bit of 'buy the recent winner' or 'buy the recent loser' (not saying BMO is a loser).
Dividend stocks are an excellent way to invest in stocks.
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