Bank of Montreal: A Dividend Dynamo with Room to Grow

In a world where reliable income investments are scarce, Bank of Montreal (BMO.TO) stands out as a consistent performer. With a 7.6% annual dividend growth rate over the past decade, a healthy payout ratio (currently 58%, forecast to drop to 51% by 2028), and 31.1% projected EPS growth over the next three years, BMO combines dividend sustainability with capital appreciation potential. Let's unpack why this Canadian banking giant is worth a closer look.

Dividend Growth: A Decade of Relentless Progress

BMO has been a dividend stalwart, increasing payouts steadily for over 10 years. Over this period, the annual dividend per share has more than doubled, rising from CAD 3.12 in 2015 to CAD 6.52 in 2025. The latest quarterly dividend of CAD 1.63 (up 2.5% from Q1 2025) underscores this commitment.

What makes this growth credible? Strong earnings coverage. BMO's payout ratio—a measure of dividends relative to earnings—has averaged 58% over the past three years, well below the 72% peak of a decade ago. Analysts project this ratio to decline to 51% by 2028, signaling even stronger earnings growth ahead.

Why the Payout Ratio Matters

A payout ratio below 60% is typically seen as sustainable, and BMO's current 58% comfortably fits this profile. The forecasted drop to 51% by 2028 implies two things:
1. Earnings are growing faster than dividends, creating a cushion for further hikes.
2. Management is prudent, prioritizing long-term health over short-term boosts.

This contrasts sharply with peers like Royal Bank of Canada (RY.TO), which has a higher payout ratio. BMO's conservative approach reduces the risk of dividend cuts, even in downturns.

EPS Growth: The Engine Behind the Dividend

BMO's dividend strength is underpinned by robust earnings. Analysts project EPS to grow by 31.1% over the next three years, driven by:
- Strategic investments: Digital banking platforms, AI-driven efficiency gains, and the acquisition of Burgundy Asset Management (Jun 2025) are boosting margins.
- U.S. expansion: BMO's U.S. banking segment now contributes over 40% of earnings, with plans to improve its return on equity (ROE) to 12% by 2026 from 6% in 2024.

This growth isn't just hypothetical. In Q2 2025, BMO beat EPS estimates by 2.7%, signaling operational resilience.

The Yield: A Safe Harbor in a Low-Yield World

With a current yield of 4.4%, BMO offers a compelling income stream. While below the top 25% of Canadian dividend payers (6.0%), it's well above the market's bottom 25% (1.8%). For investors seeking stability, this is a sweet spot—high enough to compete with bonds, but low enough to suggest room for growth.

Moreover, BMO's total shareholder yield (dividends + buybacks) is 5.5%, with buybacks contributing 1.0%. This dual approach ensures capital is returned efficiently.

Risks and Considerations

No investment is without risks. BMO faces headwinds like:
- Economic uncertainty: Canada's potential recession could pressure net interest margins.
- Credit losses: Rising defaults in a slowing economy could strain profits.

However, BMO's strong balance sheet (Tier 1 capital ratio of 14%) and diversified revenue streams (retail banking, wealth management, and commercial lending) mitigate these risks. Management's track record—e.g., navigating the 2008 crisis without cutting dividends—builds confidence.

Verdict: Buy for Income and Growth

BMO is a rare bird in today's market: a dividend stock with both yield (4.4%) and capital appreciation potential. Its low payout ratio, robust EPS growth, and strategic moves in digital banking and the U.S. market position it to thrive.

For income investors, the upcoming dividend payment on August 26, 2025 (ex-date July 30) offers an entry point. Longer-term holders can benefit from the projected 4.8% yield by 2028 and a stock price expected to rise alongside earnings.

Bottom Line: BMO's combination of dividend reliability and growth catalysts makes it a standout choice for portfolios seeking stability and upside in a yield-starved environment.

Investment thesis: BMO is a buy for income investors seeking a blend of dividend safety and growth, with a target price of CAD 150 (based on 2026 EPS estimates).