Investors looking for a generous dividend yield should take a closer look at Toronto-Dominion Bank (TD 0.75%) and Bank of Montreal (BMO -0.13%), which both have 4.3% yields. If history is any guide, these two reliable dividend payers would be a great place to invest $1,000 today even though the economic outlook is a bit cloudy. Here's a look at why.
Simple businesses
TD Bank and Bank of Montreal, as these two banks are more commonly referred to, are both fairly simple. The bulk of their operations are tied to things like taking in deposits and using those funds to issue loans, in the form of things like mortgages. They have other business lines, of course, but their cores are pretty bland. That's good and bad, though today the bad is in the spotlight.
Image source: Getty Images.
That's because investors are worried about a recession. When economic times are hard, fewer people take out loans. That means less business for banks. And, worse, borrowers run into trouble paying back their existing loans, leading to higher losses.
Shares of Bank of Montreal and TD Bank are down 17% and 18%, respectively, over the past year. There's no question that the concerns here are reasonable.
However, with generous 4.3% dividend yields, income investors looking for reliable income stocks should probably take notice. Wall Street's fear could end up being an opportunity to put your cash to work. Here are four factors to keep in mind.
1. Conservative by design
Both TD Bank and Bank of Montreal are Canadian banks. Canada's government takes a fairly aggressive approach with its banking sector, notably limiting industry competition. Both of these banks are in the upper echelon in the Canadian banking market and are highly unlikely to be unseated.
Moreover, there's something of an ingrained conservative ethos in the biggest Canadian banks, which means they typically err on the side of caution, no matter what is going on. That's a bit different from the U.S., where banks often take on more risk.
2. Dedicated to dividends
Bank of Montreal's dividend history page includes this note: "BMO Financial Group is the longest-running dividend-paying company in Canada." And TD Bank has paid a dividend every year for over 165 years. To be fair, the dividends haven't gone up every single year, but dividend investors should be pretty pleased with the dedication to the dividend that each of these companies has shown over time.
3. Ready ahead of time
Another notable factor here is that TD Bank has a Tier 1 capital ratio of 16.2%. The Tier 1 ratio is a gauge of how well a bank is prepared to deal with adversity, like a recession. Higher numbers are better. TD Bank believes it has the second-highest Tier 1 ratio in North America. Bank of Montreal's Tier 1 ratio is 16.7%.
In other words, these two Canadian banking giants are likely the best-prepared banks in North America for the recession that investors are worried about.
4. Continuing to grow
That said, investors shouldn't just be looking for a bank that can withstand hard times. If you are investing $1,000 of your hard-earned cash, you should also be thinking about growth.
On that score, TD Bank and Bank of Montreal are both expanding their U.S. operations. Bank of Montreal agreed to buy Bank of the West in late 2021, and TD Bank inked a deal to buy First Horizon in 2022. TD Bank also agreed to acquire investment bank Cowen in 2022 as well.
The U.S. market is far more fragmented than the Canadian market, allowing TD and Bank of Montreal to grow by rolling up smaller players. That growth, meanwhile, is supported by the core Canadian operations, which act as a solid foundation. It's a great mix for more conservative investors.
Don't wait too long
There's probably no rush here, given that the fear of a recession in 2023 is still quite high. However, if you want to get the most bang for your $1,000, you probably should act sooner rather than later.
Eventually, Wall Street will figure out that TD Bank and Bank of Montreal are strong banks to own for the long term, which could result in solid stock rebounds. Moreover, you're being paid pretty well to wait out the uncertainty, given the way-above-market yields here.
