My core dividend investing approach can be simplified down to buying reliable dividend stocks when they have historically high yields. That's why I first bought Toronto-Dominion Bank (TD 0.63%) in 2016 and why I added more to my position in March 2024.
But there's more to the story that you need to understand since my decision to buy the stock again meant that the yield had gotten historically high. Here's what you should know.
Toronto-Dominion Bank is a conservative giant
TD Bank, as Toronto-Dominion Bank is normally called, is the No. 2 bank in Canada by deposits. It is the No. 6 bank in all of North America on that measure, and it also has a material presence in the United States. Simply put, it is a large and important financial institution.
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What's interesting here is that Canadian banks face much more regulation than U.S. banks. This has, effectively, given giants like TD Bank entrenched market positions. The bank is unlikely to be unseated in its home market, so Canada is a very reliable foundation on which the company can grow. That said, all the regulations in Canada have created a conservative ethos throughout the largest Canadian banks. That tends to pervade all aspects of their businesses, including non-Canadian operations.
So not only does TD Bank have a solid core business, but it is a fairly conservative bank, as well. As a dividend investor, I like that backstory. Some quick dividend facts will help here. For starters, TD Bank has paid a dividend every year since it started paying dividends in 1857. And when the largest U.S. banks were forced to cut their dividend during the Great Recession, TD Bank held its dividend steady. Those are both big positives in my book.
TD Bank's yield is high again
When I first bought TD Bank in 2016, the yield was up around 4% or so. The company has increased the dividend each year since, and the stock has risen to account for that dividend growth. I'm soundly in the plus column on my investment. But TD Bank didn't have the best year in 2023, so the stock has pulled back, pushing the yield into the 5% space. I decided to buy a few more shares, even though the position has increased in size materially since I first bought in.
Basically, I don't think the issues worrying Wall Street are game changers. The first big concern is the impact that the rise in interest rates will have on the Canadian housing market. This is a legitimate worry. Canada's housing market was on a tear until rates started to go up. It has since cooled materially. That means less mortgage activity and the real risk that customers will have more trouble paying their loans given the headwind of higher rates.
However, at the end of the fiscal first quarter, TD Bank had the second-best Tier 1 Capital Ratio in Canada at 13.9% (that's also the third-best in all of North America). This metric assesses how well a bank is prepared for adversity. TD Bank is quite literally the bank that's second-best prepared for the changes taking shape in the Canadian housing and banking markets. I'm confident it will muddle through just fine. Meanwhile, the company is preparing by increasing the amount of money it puts aside to deal with problem loans, but so far there hasn't been a shocking spike in those.
The second big concern is that TD Bank was forced to call off the acquisition of a U.S. bank because U.S. regulators were worried about TD Bank's money-laundering controls. This will likely result in a fine, and TD Bank will probably have to regain regulator trust before it can buy smaller banks in the U.S. again.
Neither of those are positives. But investment-grade-rated TD Bank is large and financially strong, it can handle this setback. It will mend its money-laundering practices, take its lumps (a fine), and continue to open new locations until it is allowed to buy competing banks again. So growth will slow down, but it won't stop. That's another muddle-through situation.
All in all, my take is that TD Bank is going to be a near-term laggard. But over the long term, it will get back on its feet again. And that is exactly the type of stock I like to buy. In fact, it was hard for me to justify not adding to my position.
I don't normally do this
What's interesting here is that I have a dollar-value level where I stop putting money into a stock so that it doesn't become too large in my portfolio. I broke my rule for TD Bank because I think it is such a good company. I don't break investment rules lightly and actually spent a couple of weeks wrangling with this decision.
But in the end, I couldn't miss out on what I saw as a unique opportunity to buy more of a great bank while it had a historically high yield. I'm happy to collect fat dividend checks while I wait for it to muddle through the problems that have Wall Street, likely unnecessarily, tied up in knots.
