Toronto-Dominion Bank (TD 0.75%), generally referred to as TD Bank, boasts a generous 4.2% dividend yield at recent prices. Compare that to Bank of America's 2.6%, and you can see why dividend investors might prefer the Canadian giant over the U.S. behemoth.
But there are more reasons than that to like TD, including its more impressive dividend history. Here are some things you need to know.
A protected market
The Canadian banking industry is highly regulated, with a strong government push toward conservative operations. There are two important takeaways here. First, Canada has a small number of very large players with entrenched positions, and they are unlikely to be unseated. TD Bank is one of those players. Second, Canadian banks tend to err on the side of caution throughout their business regardless of where they are operating.
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By comparison, the U.S. market is far more fragmented and less regulated, and industry players have a habit of taking on more risk. That was on clear display during the Great Recession when even industry giants like Bank of America and Citigroup ended up cutting their dividends. TD Bank held its dividend steady through that period because Canadian regulators wouldn't allow dividend increases, looking to ensure that the country's banks remained well-capitalized. The dividend started to grow again when the regulators loosened up.
Essentially, TD Bank's Canadian banking operation, which makes up roughly 42% of earnings, is a solid core on which to grow in areas with more opportunities.
Expanding down south
The bulk of the growth opportunity is to be found in the United States, which accounts for 31% of TD Bank's overall earnings. The wealth management and wholesale divisions make up a combined 20% of earnings. These divisions have notable opportunities for growth in the U.S. market. And as TD Bank takes advantage of them, it should be able to keep increasing its dividend over time. (The remainder of earnings not discussed above is derived from an investment in Charles Schwab.)
Here's the thing: TD Bank is taking advantage of the opportunities right now. For example, it agreed to buy Southeastern regional bank First Horizon in early 2022. The $13.4 billion deal is working through the regulatory process and will likely close sometime this year. Adding First Horizon to TD Bank's existing U.S. footprint will cement its position in the top half-dozen banks in the country. And it will still have exposure to mostly the East Coast of the United States, meaning there's more room for long-term growth as it expands geographically.
In addition to First Horizon, TD Bank also agreed to buy investment banking firm Cowen. This mid-2022 deal was valued at $1.3 billion and will expand TD Bank's reach in the investment banking arena (it appears that Cowen will be incorporated into TD Bank's wholesale division) and increase the company's overall capabilities in the space, positioning this smaller unit for more long-term growth. This deal should close in 2023 as well.
Acquisitions are lumpy and virtually impossible to predict, but TD Bank has shown a real penchant for making deals in the United States. As these two purchases get integrated, there's likely to be a period of inactivity on the acquisition front. Investors shouldn't despair, though, because the benefits of these two deals will be the big story during that lull. And once digested, if history is any guide, TD Bank will start looking for more business-enhancing deals.
Expect more increases
As noted, TD Bank hasn't increased its dividend every single year, though a strong reason for that has to do with regulators and not with the bank itself. But the general trend is for higher payments over time backed by a solid Canadian banking foundation and a growing reach in the U.S. market. That's a strong game plan and one that doesn't seem likely to need changing anytime soon. If you like big dividend yields backed by a growing dividend stream, TD Bank should be right up your alley.
