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Get Paid While You Wait: 3 Top Dividend Stocks in Banking

By Matthew Frankel, CFP® – Updated Apr 12, 2019 at 5:46PM

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These three bank stocks could add steady income and growth potential to your portfolio.

Even though we're more than a decade past the financial crisis, some banks are still among the most attractively valued stocks in the market. What's more, there are several that pay excellent, reliable dividends. Here's why I think Toronto-Dominion Bank (TD -1.03%), Wells Fargo (WFC -0.69%), and Synchrony Financial (SYF -2.25%) could be excellent choices for income investors who want exposure to the financial sector.  

This north-of-the-border giant has been paying dividends since before the Civil War 

Canadian bank stocks make excellent choices for dividend investors, as their payouts aren't governed by the Federal Reserve and therefore tend to be higher than their U.S. counterparts. Toronto-Dominion Bank, commonly known as TD Bank, is one that could be worth a closer look right now. 

Jar of coins labeled dividends.

Image source: Getty Images.

The sixth-largest North American bank, TD has large operations in Canada as well as the U.S., and also owns over 40% of TD Ameritrade. The bank has one of the best-run operations in the industry, with a high-quality loan portfolio and extremely solid balance sheet. TD has even been named the "safest bank in North America by Global Finance magazine.  

And just because it's a massive institution doesn't mean there isn't room to grow. With most of its U.S. operations concentrated on the East Coast, TD still has lots of room to expand going forward. 

As far as dividends go, it's tough to find a better track record of reliability. In fact, TD Bank has paid dividends since 1857, and has a fantastic history of giving shareholders raises. The stock currently yields 3.6%, and there's no reason to think that the payout won't continue to grow in the future.  

Patient investors could be rewarded by this bank's aggressive capital return 

Wells Fargo has been one of the worst-performing bank stocks over the past few years, and to be fair, there's good reason why. You've probably heard of the bank's infamous fake-accounts scandal, and there has been a series of other scandals revealed in the time since, including one involving charging auto loan customers for insurance they didn't need or improperly charging fees for mortgage delays. 

As a result of its bad behavior, the Federal Reserve slapped the bank with an unprecedented penalty. Wells Fargo is not allowed to grow beyond its asset size as of the end of 2017. This has understandably caused many investors to jump ship -- after all, who wants to invest in a bank that isn't allowed to grow in arguably the best growth environment for banks in decades? 

However, there are a few things to keep in mind. For starters, Wells Fargo still has excellent asset quality and is a generally strong bank. Also, Wells Fargo is buying back stock at a breathtaking rate. It was approved to spend as much as $24.5 billion on buybacks in the one-year period through June 2019, and this translates to roughly 9% of its outstanding shares.  

In other words,Wells Fargo is using an aggressive capital return to take advantage of its depressed valuation. While the next year or two could be a bit volatile for the bank, long-term investors with the patience to ride out its recovery could be handsomely rewarded.  

A high dividend and a ridiculously cheap valuation 

Store credit card giant Synchrony Financial is another bank stock that has underperformed recently. The store credit card business is more recession-prone than many other forms of lending, and Synchrony lost its valuable Walmart co-branding partnership in mid-2018, so there's certainly a reason for the slump.  

Having said that, Synchrony's business is highly profitable and growing nicely. As of the fourth quarter, its net interest income grew by 11% year over year, and its deposit platform went up by $7.5 billion in net deposits, which provide the bank with low-cost funding to grow its operations. And with higher-than-average interest rates, store credit cards can be wildly profitable, even with an uptick in delinquencies. (Note: Synchrony's delinquencies haven't meaningfully risen recently.)

Synchrony is trading for approximately seven times trailing-12-month earnings, so it could be a smart time to add this excellent business to your portfolio while it is trading for such a fire-sale valuation. In fact, I recently called Synchrony my top overall bank stock to buy. 

Check out the latest SynchronyWells Fargo and TD Bank earnings call transcripts.


Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
$40.22 (-0.69%) $0.28
The Toronto-Dominion Bank Stock Quote
The Toronto-Dominion Bank
$61.33 (-1.03%) $0.64
Synchrony Financial Stock Quote
Synchrony Financial
$28.19 (-2.25%) $0.65
Walmart Stock Quote
$129.70 (-1.93%) $-2.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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