Toronto-Dominion Bank: This Foreign Bank Stock Is a Passive Income Machine
Looking for Reliable Dividends? Read This
If you want to earn reliable passive income from stocks, you generally have to look at recession-proof industries. The reason is simple: in a recession, many companies cut their dividends. So if you plan to live off dividend income, you better hope that the companies in your portfolio can maintain their payouts when the going gets tough.
Banks run very lucrative businesses, but they aren’t exactly known for providing recession-proof dividends. To understand that, all you need to do is look at the financial crisis of 2008. During that downturn, some of America’s biggest banks—such as JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), Citigroup Inc (NYSE:C), and Bank of America Corp (NYSE:BAC)—reduced their dividends.
Yet north of the border, things weren’t nearly as bad for income investors. I’m not saying Canadian banks are better than U.S. banks; it’s just that if you want reliable dividends, some Canadian banks have better track records than their U.S. counterparts.
Check out Toronto-Dominion Bank (NYSE:TD), for instance.
TD stock paid higher dividends every year from 2003 to 2009, maintained its payout in 2010, and went back to paying increasing dividends every year since 2011. (Source: “Dividends,” Toronto-Dominion Bank, last accessed March 26, 2021.)
From 1995 to 2020, Toronto-Dominion Bank stock’s per-share payout went from CA$0.22 to CA$3.11, translating to a compound annual growth rate (CAGR) of approximately 11%.
And if you look further back, you’ll see that TD stock has paid uninterrupted dividends for 164 years.
Of course, past performance is no guarantee of future results. Toronto-Dominion Bank’s impressive dividend growth history is a testament to how resilient its business has been.
TD bank operates through three main business segments: Canadian Retail, U.S. Retail, and Wholesale Banking. In the bank’s most recent fiscal year, Canadian Retail and U.S. Retail accounted for 76% of its total reported earnings. (Source: “Investor Presentation: Q1 2021,” Toronto-Dominion Bank, last accessed March 26, 2021.)
There are a few neat things about the bank having a retail focus. For one, retail banking tends to be less cyclical than wholesale banking. At the same time, retail banking relies on a large customer base, while wholesale banking can be lucrative with a small number of customers. This implies that it’s more difficult to build a competitive position in retail banking—you need a massive network of branches, ATMs, and employees to serve a large number of customers.
As it turns out, TD Bank has an established market position in retail banking. Its network includes 1,087 branches and 3,422 ATMs in Canada, and 1,223 branches and 2,783 ATMs in the U.S. The bank serves more than 26 million customers worldwide, including 14.8 million active online and mobile customers.
While Toronto-Dominion Bank stock doesn’t get as much attention as U.S. bank stocks in the financial media, it’s a name to be reckoned with. In terms of total assets, TD is the largest bank in Canada and the fifth-largest bank in North America.
Now, we know the COVID-19 pandemic isn’t over yet—there’s been some concern about a fourth wave—so there’s uncertainty ahead for the economy. TD Bank, though, has already made a strong recovery.
According to its latest earnings report, the bank generated CA$10.8 billion of revenue in the first quarter of its fiscal year 2021, which ended January 31. The amount represented a two-percent increase year-over-year. (Source: “TD Bank Group Reports First Quarter 2021 Results,” Toronto-Dominion Bank, February 25, 2021.)
The bank’s adjusted earnings came in at CA$1.83 per share, up 10% from the CA$1.66 per share earned a year earlier.
Notably, TD Bank’s total loans and total deposits both increased from a year earlier. For a company that makes money by lending cash out at higher interest rates than it borrows the money at, a larger portfolio of loans and deposits is certainly good news.
Another thing worth noting is that Toronto-Dominion Bank’s provision for credit losses (PCL) was CA$316.0 million in the first fiscal quarter. The amount was substantially lower than the CA$921.0 million of PCL in the previous quarter and the CA$923.0 million of PCL in the year-ago period.
On the dividend front, things look pretty solid, too. The bank paid a cash dividend of CA$0.79 per share in the first fiscal quarter. Compared to its adjusted earnings of CA$1.83 per share, that’s a payout ratio of about 43%. TD Bank said its target payout range is between 40% and 50%.
Bottom Line on Toronto-Dominion Bank
Even though Toronto-Dominion Bank is based in Canada, its stock trades on the New York Stock Exchange, so it’s very convenient for American investors to own shares. At its current price, TD stock yields 3.9%.
With a rock-solid business, a generous dividend yield, and an impressive track record of returning cash to investors, Toronto-Dominion Bank stock is one of the best dividend plays on the market.