Is Toronto-Dominion Bank the best high-yield bank stock for you?
TD Bank has a historically high yield of 5.2%, but you should understand some risks before jumping on board.
Toronto-Dominion Bank (T.D. 0.30%) The stock yields 5.2%, well above the banking sector standard of about 3%. SPDR S&P Bank ETF As an industry representative. If you’re a dividend investor looking to buy bank stocks, you’ll probably be interested. However, before you buy TD Bank, as it is more commonly known, you need to understand both the positives and negatives it is facing.
TD Bank is an industry leader.
Toronto-Dominion Bank, headquartered in Canada, is one of the largest banks in North America. It is the second-largest depositories in the domestic market and the sixth-largest by that measure in all of North America. It is important to understand the two different parts of the business.
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Canada has a highly regulated banking industry. These regulations have given the largest banks a strong market position. So, although TD Bank faces competition, it is unlikely to fall out of the top ranks in the Canadian market. And strict regulations have fostered a conservative tone within Canada’s largest banks, including TD Bank. Overall, Canada is a strong base for Toronto-Dominion Bank.
The United States, which accounts for most of its remaining business, is a growth market for TD Bank. Regulation is less stringent and the U.S. banking industry is highly fragmented. This allowed TD Bank to expand organically by opening new branches and inorganically by acquiring smaller banks. Currently, TD Bank operates primarily on the East Coast. This means there are plenty of opportunities for geographic expansion in the future.
Meanwhile, TD Bank has an investment-grade balance sheet and one of the best Tier 1 ratios in North America (Tier 1 ratios are a measure of how well prepared a bank is for adversity). There’s no particular reason to believe that a company that has paid dividends annually for over 100 years is in danger of going out of business. Add in a historically high dividend yield of 5.2%, and investors will likely be quite interested in the stock.
TD data from YCharts
Why is TD Bank’s rate of return so high?
But before dividend investors jump in, it’s worth looking at the reasons for TD Bank’s unusually high yields. There are two main issues, one of which may be of particular concern to most investors, but especially those focused on the short term.
First of all, TD Bank’s Canadian operations are undergoing major changes. The domestic housing market has been on the rise for a long time. Then, inflation caused interest rates to rise, increasing the cost of mortgages used to buy homes. Afterwards, the housing market began to cool. Higher interest costs can reduce demand for loans and increase the number of problem loans banks have to process. Investors should understand that TD Bank has substantial exposure to a slowdown in the Canadian housing market. Of course, this isn’t unique to TD Bank, but it’s still a headwind.
The second problem is largely self-inflicted. This is why TD Bank’s stock price is falling even though most of its Canadian peers are rising. In 2023, U.S. regulators halted TD Bank’s efforts to acquire a U.S. regional bank. This occurred because TD Bank’s money laundering controls were not strong enough. While it works with regulators to resolve this issue, it will likely face large fines and the acquisition will likely be put on hold until it rebuilds trust with U.S. regulators.
TD data from YCharts
So in the near term, TD Bank is likely to report weak results due to one-time costs. In the medium term, growth is likely to be slower than some investors would like because it is not allowed in the U.S. acquisition market. Investors responded to these problems by lowering stock prices. That’s probably justifiable, but both of these problems will eventually pass, opening up opportunities for investors who think in decades rather than days. It will just take some time, and headlines for the coming months and even years may be difficult to read.
Open your eyes and go in
TD Bank is generally a well-run bank with a long history of success. So more conservative investors might want to consider this. However, it is important to understand that news flow may be very poor in the short term and this may cause the stock to underperform compared to its peers. There is no clear way to know how long the jitters will last, which could turn off some investors. However, given the high dividend yield, the risk-reward balance seems reasonable, assuming you’re comfortable receiving a fat payout while waiting for the company to experience short-term headwinds.
