Is Bank of Montreal (BMO) a Great Dividend Play?

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

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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Bank of Montreal in Focus

Bank of Montreal (BMO) is headquartered in Toronto, and is in the Finance sector. The stock has seen a price change of -0.97% since the start of the year. The bank is paying out a dividend of $0.72 per share at the moment, with a dividend yield of 3.73% compared to the Banks - Foreign industry's yield of 2.96% and the S&P 500's yield of 1.78%.

In terms of dividend growth, the company's current annualized dividend of $2.95 is up 7.7% from last year. Bank of Montreal has increased its dividend 3 times on a year-over-year basis over the last 5 years for an average annual increase of 0.02%. 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. Bank of Montreal's current payout ratio is 45%. This means it paid out 45% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, BMO expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $6.95 per share, representing a year-over-year earnings growth rate of 11.38%.

Bottom Line

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. However, not all companies offer a quarterly payout.

For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that BMO is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).

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