Best source of dividend growth in Canada

The major Canadian banks are positioned for growth in 2017, thanks to a strengthening economy and increased investor optimism.

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So says Colum McKinley, vice-president of Canadian equities at CIBC Asset Management, and manager of the Renaissance Canadian Core Value Fund. He finds, “Bank operating results have been very strong; we have seen a continuation of very attractive loan growth, both on the consumer [and] commercial side.”

Further, “many of the fears about big loan losses for the Canadian banks [as well as] fears around the housing markets have, at this point, been proven as untrue. So there’s a great opportunity for earnings to be supported” in the financial space.

Read: What investors should expect for 2017

Another factor spurring the banks’ strength is the performance of their capital markets-related businesses. McKinley says these have “performed quite well over the last number of quarters. That is generating strong excess capital for the banks, and they have used that to buy back shares and increase dividends to shareholders.”

He’s optimistic about 2017. One reason for this is the provision for credit losses are set to trend lower over the coming quarters.

In McKinley’s view, the banks’ most attractive features are that they yield around 4%—which he calls above average—and they consistently grow their dividends.

“[Major banks] are one of the best, most attractive sources of dividend growth in the Canadian marketplace,” he explains. “All of the studies show companies that can consistently pay high dividends and grow those dividends over time […] tend to outperform broader markets” over the long term.

He anticipates the banks will continue to deliver “above-average returns for many years to come.”

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A new bank pick

McKinley has exposure to all major Canadian banks, but added Canadian Western Bank to his portfolio at the end of 2016. “It’s a bank that has traded down to a very attractive valuation, given some of the fears that existed because of low oil prices. [But] we are actually seeing green shoots of economic growth in Western Canada, and a stronger oil price will help contribute to ultimately Alberta’s economy bottoming and starting to improve.”

He thinks Canadian Western Bank will benefit. “All of the banks [have] exposure to Alberta, but Canadian Western Bank, given their geographic footprint, has a much higher exposure to that recovery.”

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