Toronto-Dominion Bank (TD 0.05%) -- or TD Bank, as most people call it -- is a giant Canadian financial institution. It has a historically high 5.3% dividend yield, which happens to be well above the 2.8% average for banks, using SPDR S&P Bank ETF (KBE 0.69%) as a proxy. If you are a dividend investor looking for a bank stock, you should strongly consider TD Bank today. Here's why you might want to buy it -- and a couple of reasons why you might not.
Toronto-Dominion Bank is big, strong, and rewarding
TD Bank is the second-largest bank by deposits in Canada, its home market. It is the sixth-largest bank on that measure when you open up the lens to all of North America. The company is, without a doubt, an industry heavyweight. But there are two important takeaways here.
Image source: Getty Images.
First, Canada's banks are highly regulated. That has resulted in the largest banks effectively having entrenched and protected market positions. Also, the heavy hand of regulators has created a conservative ethos that pervades Canadian banks. Simply put, TD Bank's Canadian roots provide a very solid business foundation for the company. Notably, TD Bank has paid a dividend every year since 1857!
Second, TD Bank's U.S. business is largely located on the East Coast. That means that there's a lot of geographic expansion ahead in what is basically the company's growth market. While the U.S. banking industry is mature, it is also highly fragmented. So there is ample room for organic and inorganic (acquisition-led) growth.
If you are a long-term dividend investor, TD Bank should be pretty appealing today. But as you might expect, there's a reason why the dividend yield is so high right now relative to the rest of the banking industry.
TD Bank has a couple of headwinds to deal with
The biggest concern with TD Bank probably has to do with the housing market in Canada. Home prices had been on a swift upward path until interest rates started heading higher a couple of years ago. That has resulted in Canada's housing market hitting a weak patch, which is bad for TD Bank's mortgage business. Worse, elevated interest rates will also result in higher interest costs for the bank's customers. That could lead to an increase in troubled loans, which would also be bad for TD Bank.
That said, TD Bank's 13.9% Tier 1 capital ratio -- a measure of how well a bank is prepared for adversity -- is the second highest in Canada and the third highest in North America. It appears ready to muddle through hard times, even though that won't necessarily reduce the impact of the headwinds.
The next big problem for TD Bank hails from the United States, where a planned acquisition was recently scuttled by regulators. U.S. regulators were displeased with TD Bank's controls around money laundering, an issue the bank will address. But it is likely that there will be a fine and that acquisitions in the United States will be off the table for a little while. The bank can still open new locations, but growth will probably slow down over the near term. Longer term, TD Bank will likely regain regulators' trust and be allowed to buy its way to growth at some point in the future.
TD Dividend Yield data by YCharts
Toronto-Dominion Bank looks historically cheap
Here's the thing: TD Bank's dividend yield isn't just high relative to the larger banking sector; it is also near the highest levels going back to before the turn of the century. The only time the yield was higher was during the coronavirus pandemic and the Great Recession. In other words, it appears that Wall Street has tossed TD Bank onto the sale rack.
That said, there are clearly caveats here; TD Bank stock isn't randomly cheap. But given the long-term success the bank has achieved and its incredible dividend record, it seems like buying this banking giant will be a good risk/reward trade-off for most investors.
