Blogs & Comment

Show me the money

Your bank's not going to increase its dividend as fast as you'd like.

(Photo: REB Images/Getty)

It’s been a wild 31 days for Canadian banks. August’s volatile markets sent financial stocks on a bumpy ride—between Aug. 2 and 8, for example, Scotiabank’s stock fell 7.84%, then climbed nearly 4% the following week; fell 8.5% the week after, and finished the month up 0.15%. Other banks experienced similar swings. So news this week that yet another financial institution exceeded its profit estimates for the quarter—TD, up 23%—should thrill battered investors.

However, not every bank shareholder is jumping with joy. While higher profits are great, many people, especially income investors and retirees, were hoping  the banks would finally start increasing their dividends.

Banks used to steadily raise dividends (about twice a year), but when the financial crisis hit, many froze their payouts. Now, with Canadian financials doing well, most people think it’s time the banks start paying up. Analysts figured Scotiabank would up its dividend this quarter—its net earnings rose by 21%—but it didn’t happen.

Rick Waugh, Scotiabank’s CEO, told The Globe and Mail that while he knows dividend increases are important, he’s “mindful that we earn a very high return on our reinvestment of earnings. So it’s a balance between what our shareholders should require in dividends, and secondly with the opportunities we see for growth.”

Scotiabank did increase its dividend in March, which is more than the Bank of Montreal has done since freezing its payouts in 2008. BMO’s dividend freeze was lifted last September, but it hasn’t yet increased its payments.

Other banks have increased their dividends this quarter—TD raised it 3%, the second increase in three quarters, while CIBC raised its payout by 3.4%, the first increase for the bank in four years.

Norman Raschkowan, an executive vice-president at Mackenzie Financial, says the reason banks haven’t increased dividends much this year is that they’re now going to pay them annually—which is what they’ve done historically—instead of the twice a year we saw prior to the recession. “It appears the banks are returning to their historical practice,” he says.

In other words, people should lower their expectations. “Twice a year was the aberration,” he says. “It’s common practice for companies to review their divined policy on annual basis. Banks may have moved to twice per year because they felt pressure from shareholders when income trusts were a popular income alternative.”

Disappointed that you won’t be getting a more regular increase? Take comfort in the fact that our banks can raise dividends—in the U.S. some institutions, like Bank of America, are barred by the government from increasing payouts.