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This is Why Bank of Montreal (BMO) is a Great Dividend Stock

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Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Bank of Montreal in Focus

Based in Toronto, Bank of Montreal (BMO - Free Report) is in the Finance sector, and so far this year, shares have seen a price change of 15.2%. The bank is currently shelling out a dividend of $0.83 per share, with a dividend yield of 3.8%. This compares to the Banks - Foreign industry's yield of 1.59% and the S&P 500's yield of 1.38%.

Looking at dividend growth, the company's current annualized dividend of $3.33 is up 5.8% from last year. Bank of Montreal has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 5.13%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Right now, Bank of Montreal's payout ratio is 53%, which means it paid out 53% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for BMO for this fiscal year. The Zacks Consensus Estimate for 2021 is $8.63 per share, with earnings expected to increase 50.61% from the year ago period.

Bottom Line

Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. However, not all companies offer a quarterly payout.

High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that BMO is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #1 (Strong Buy).


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