Bank of Montreal (TSX:BMO) is up 10% in the past month. Investors who missed the bounce are wondering if BMO stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.

BMO stock price

Bank of Montreal trades near $123 per share at the time of writing. The stock slipped as low as $102 in the past year, but is way off the $150 it reached in early 2022.

In early February 2023, Bank of Montreal bolstered its American business with its US$16.3 billion purchase of Bank of the West, a California-based regional bank. The deal was announced in late 2021 when bank stocks were near their post-pandemic highs. The acquisition closed right before chaos hit the American regional bank sector. This is one reason investors might have soured on BMO stock in the past year.

More recently, the fiscal Q3 2024 results reported a big jump in provisions for credit losses (PCL) compared to the same period last year with increases occurring in personal and commercial banking operations in Canada and the United States and higher PCL in the capital markets division. High interest rates have put pressure on businesses and households with too much debt. The weak earnings contributed to the late-August plunge in the stock.

Now that both the U.S. Federal Reserve and Bank of Canada have started to reduce interest rates, there should be a decline in PCL at Bank of Montreal in the coming quarters. This will help support profits and can free up more cash for distributions.

Dividend

Bank of Montreal has paid a dividend every year for nearly two centuries. The current annualized payout is $6.20 and provides a yield right now of about 5%. Bank of Montreal has a solid capital position and remains very profitable, so investors should see dividends continue to grow.

Upside

The Bank of the West purchase has been an overhang on the stock, but the purchase should deliver long-term benefits for shareholders. The U.S. market is massive and the Bank of Montreal has successfully grown the U.S. business through acquisitions over the past 40 years.

Time to buy?

Near-term volatility should be expected. Markets are close to all-time highs and the sharp bounce in bank stocks in recent weeks warrants some caution. That being said, BMO should still be a solid pick at this level for a buy-and-hold portfolio. Investors might want to take a half position and look to add to the holding on any new weakness. With a 5% yield, you get paid well to ride out additional turbulence.