If you are looking at the financial sector, here’s why this bank, with a 5.1% yield, should be on top of your investment wish list.
Toronto-Dominion Bank (TD 0.79%) is yielding 5.1% right now, which is at the high end of the stock’s historical yield range. If that’s not enough to entice you to invest $1,000, that yield is also around twice the 2.5% yield you’d collect from the average bank, using SPDR S&P Bank ETF as a benchmark. Before you run out and buy the stock, here’s a deeper look at why TD Bank is the best high-yield bank to buy right now.
TD Bank has a very attractive dividend and business
It is notable that TD Bank’s yield is near its historical highs, but there’s some more context to offer here. The only times in recent history that the yield has been this high were during the Great Recession and the early days of the coronavirus pandemic. Those were massive economic dislocations, which shows just how unusual the yield situation is today for the bank.
Image source: Getty Images.
Before getting to why the yield is so high, however, there are some other dividend facts to consider. For example, TD Bank has paid a dividend continuously since 1857. That’s a long time. The bank is based out of Canada, where heavy government regulation has resulted in the country’s largest banks having entrenched industry positions. TD Bank is one of those banks, ranking second by deposits. That creates a solid business foundation as the company looks to grow in the United States.
Also notable is Canada’s heavy regulatory regime, which has resulted in Canadian banks like TD Bank having relatively conservative operations. That’s something that permeates the entire bank’s culture, not just its Canadian operations. Notably, TD Bank has an investment-grade-rated balance sheet, and its Tier 1 Capital Ratio, a measure of a bank’s ability to handle financial stress, was the third best in North America (and the best in Canada) at the end of the bank’s fiscal second quarter.
TD Dividend Yield data by YCharts
So far the story here is that of a financially strong and conservatively run bank with a solid core operation that trades with a historically high yield. That’s why you might want to invest $1,000 in the bank today. But you can’t do that until you answer the one nagging question: Why is the dividend yield so high?
TD Bank messed up, and it’ll take time to fix the problem
To simplify the issue, TD Bank’s money laundering controls failed, and it is now under regulatory scrutiny because of the issue. The bank has already set aside $450 million to deal with the cost, including fines. The price tag will likely go higher from here, and, more notably, its growth plans in the United States will probably stall out for a bit (U.S. regulators forced it to cancel a planned acquisition). However, it is highly likely that TD Bank muddles through this issue. It will just take some time, perhaps even a few years. But you will be paid well to stick around, given the historically high yield.
This is where things get a little more interesting because the situation is similar in some ways to what Bank of America went through during the Great Recession. After buying Countrywide Financial, Bank of America struggled and was forced to seek assistance from Warren Buffett’s Berkshire Hathaway. This is important because of the way Buffett invests.
Without getting too deep into the woods, Buffett likes to buy good companies when they appear to be temporarily out of favor for some reason. Bank of America fit that bill because it had a strong core business that was being overshadowed by the mortgage issues it took on when it acquired Countrywide Financial during a housing-led economic downturn. Buffett stepped in to provide capital to shore up the bank’s finances so it could muddle through the problems and get back on its feet. It took a little while, but Bank of America’s solid foundation has allowed the bank to shine again.
BAC data by YCharts
TD Bank isn’t likely to need that kind of assistance, given that it is still financially strong. TD Bank just needs to upgrade its controls (which it is doing) and deal with the fines it is going to face. Given the strong Tier 1 Ratio, the fines shouldn’t be too big of a deal over the long term. Once the bank has regained the trust of U.S. regulators, it should be able to start growing more rapidly again. None of this is going to happen quickly, however, so TD Bank will be tough to own for a little while.
TD Bank is a time arbitrage situation
It is hard for institutional investors to hold onto a stock facing regulatory issues, even if those issues are likely to be resolved in time. Simply put, they have investment committees to answer to. You, as a small investor, don’t. This is why you can step in to buy TD Bank and collect its outsized dividend while you wait for the company to deal with the current headwinds. Sure, it could take a few years, but it took a few years for Bank of America to muddle through its problems, too. That trade worked out very well for Warren Buffett. You might want to consider adding high-yield TD Bank to your portfolio in a similar play on a bank facing problems that are likely to be temporary.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
