TD Stock: The No. 1 Bank Stock for Dividend Investors?
Toronto-Dominion Bank Is a Top Dividend Stock
Wholesale banking is a lucrative business. But, for income investors looking for a bank stock to add to their dividend portfolio, retail-focused Toronto-Dominion Bank (NYSE:TD) stock might be a better choice.
Let me explain.
TD stock doesn’t make headlines as often as its wholesale banking-focused counterparts. But, when it comes to rewarding dividend investors, few banks can match this Toronto, Ontario, Canada-based financial institution.
The bank currently pays CA$0.55 on a quarterly basis, giving TD stock an annual dividend yield of 3.52%. Over the past 10 years, TD stock’s quarterly payout has more than doubled. (Source: “Dividends,” Toronto-Dominion Bank, last accessed December 1, 2016.)
Note that, in the most recent quarter, TD generated 87% of its net income from U.S. and Canadian retail business. While retail banking might not sound as exciting as wholesale banking, it could be more stable in the long run, which would be a good thing for dividend investors.
You see, wholesale banking can be profitable with a smaller number of large accounts. Retail banking is a lot more complicated. It involves setting up branch networks, and therefore is a business with high barriers to entry, meaning it’s difficult for new competitors to enter the business.
Moreover, by having a much larger and more diversified customer base, the retail banking industry could also be more recession-proof than wholesale banking. And that’s good to know for income investors.
When you look at a stock with a price-to-earnings multiple of 14 times and a dividend yield of 3.52%, you know it’s probably going to be a business with an entrenched position in a slow-changing industry. And, while TD stock does fit the description, it still manages to produce growth that is not usually associated with the banking industry.
TD Bank reported earnings last Thursday. In the fourth quarter of its fiscal 2016, ended October 31, 2016, TD’s net income grew 25% year-over-year to $2.3 billion. For the full fiscal year, earnings were $8.9 billion, an increase of 11% over last year. (Source: “TD Bank Group Reports Fourth Quarter and Fiscal 2016 Results,” Toronto-Dominion Bank, December 1, 2016.)
Growth in the fourth quarter was due to strength in its “U.S. Retail” and “Wholesale” segments. Net income from U.S. Retail banking came in at $608.0 million, a 25% increase year-over-year. Wholesale banking net income, on the other hand, grew an equally impressive 21% year-over-year to $238.0 million.
And if you are wondering whether this Canadian bank might have too much exposure in the country’s oil and gas industry, which is experiencing a downturn, don’t worry. The bank reduced its “Oil and Gas Producers and Services” outstandings by $400.0 million. The sector now represents less than one percent of TD’s total gross loans and acceptances.
The Bottom Line on TD Stock
At the end of the day, don’t forget TD Bank’s resilience. The last financial crisis was not a good time for the U.S. banking industry. However, despite its exposure to the U.S. economy, TD stock did not cut its dividends.
Now, growth for U.S. banks could be on the horizon. With the surprise victory of Donald Trump in the U.S. presidential election, the banking industry could benefit from his policies, including lower corporate taxes and fewer regulations. Moreover, markets are anticipating a rate hike from the U.S. Federal Reserve this month, which would also be conducive to a bank’s performance.
Despite being a Canadian bank, TD’s sizable U.S. based revenue means it could enjoy growth just like its American counterparts. Investors looking for income and growth should take a serious look at TD stock.