The Best Dividend Stocks for 2012

Published Tue, Dec 6th, 2011   Louis Basenese, Chief Investment Strategist

Last week, I told you that Canada’s unloved banking stocks appeared to be forming a bottom. Well, let’s forget about saying “appeared.” It’s now confirmed!

Thanks to a late-week rally, all but two of Canada’s largest banks are now trading above their respective 50-day moving averages.

On top of the positive technical development, we also got some encouraging fundamental news, which only increases the urgency. Here are all the details…

The Time to Buy is Now!

When I first told you about the opportunity in Canadian bank stocks, I made it clear I wanted to see “another 3% to 5% move to the upside” for each stock before considering an entry. The reason was simple…

In a matter of three trading sessions, the stocks made a sizeable jump higher – about 8% on average. From my experience, I know sudden moves over such a short period of time could easily prove to be a head fake. And I didn’t want us to get duped.

However, that’s no longer a concern. You see, the uptrend continued through the end of last week and into this week.

As I write, Canada’s “Big Six” are up an average of about 14% from their respective 52-week lows set on November 25. And almost all of them are now trading well above their 50-day moving averages.

Simply put, the price action isn’t an anomaly. It’s the start of a definitive trend. A warranted one, no less, because Canadian bank stock fundamentals keep improving.

We’re Happy to Say, “We Told You So”

I predicted last week that, “thanks to a strong domestic economy, and a government with stable finances, Canadian banks are going to keep generating solid profits.”

We didn’t have to wait long for that confirmation, either.

Last Thursday, Toronto-Dominion Bank (NYSE: TD) reported a 37% increase in quarterly earnings. And Canadian Imperial Bank of Commerce (NYSE: CM) reported a 59% jump in fourth-quarter profits.

Then on Friday, The Bank of Nova Scotia (NYSE: BNS) reported an 11% increase in profits. And Royal Bank of Canada (NYSE: RY) reported a 43% jump in profits.

All companies handily beat analyst expectations, underscoring the fact that Wall Street remains largely clueless to the strong fundamentals and in turn, strong profit potential here.

But it’s only a matter of time before they realize that all financial stocks are not created equal. Especially since the volatility in the markets is putting a premium on safety, reliability and increased income. And that’s precisely what Canadian bank stocks offer.

You’ll recall, none required a government bailout. None slashed their dividends through the financial crisis. And all but one increased their annual dividend in the last year.

The good news is it’s not too late to invest ahead of Wall Street…

Even after the latest rally, ample upside still exists based on each bank’s five-year average price-to-earnings ratio. Not to mention, each stock sports an above-average yield.

Bottom line: If you’re after safe, income-producing investments in 2012 – with double-digit upside potential – it’s time to back up the truck and buy Canadian bank stocks before it’s too late.

Practically speaking, I suggest you spread your bets evenly among all six stocks, creating a mini-portfolio of Canadian bank stocks. Doing so will further reduce your downside risk.

For those of you that don’t have that much capital to spread around, don’t fret. I’m digging into each bank’s financials, as we speak. And just like I did with IBM and Intel, I plan to conduct a “stock war” in the next week to reveal the safest, most-compelling Canadian bank stock to own headed into 2012. So stay tuned.

Ahead of the tape,

Louis Basenese