When it comes to investing, timing can be a key determinant of long-term success. A quick comparison between Bank of America (BAC -1.07%) and Toronto-Dominion Bank (TD 0.75%) provides a stark example. If you go back a decade, Bank of America looks like a massive winner. But if you go back to 2007 the story is vastly different.
The best of times and the worst of times
Bank of America is an iconic U.S. bank, with a massive network of branches and large business units in just about every key finance sub-sector from investment banking to credit cards. Over the past decade its stock has risen a healthy 190% or so. That easily trounces the roughly-65% gain in the price of Canadian peer Toronto-Dominion Bank, more commonly known as TD Bank. That relative performance might give investors the impression that Bank of America is a way better bank.
Image source: Getty Images.
But don't judge the results too quickly. Sure, Bank of America is performing fairly well right now. But TD Bank isn't exactly struggling. There's more to the story. A quick trip back to 2007 will help explain what's going on. That year was when the world entered the Great Recession, a brutal period in which there was a very real concern that the global financial system might crumble. Banks that had taken on too much risk stumbled badly. Bank of America was one of those banks.
If you look at Bank of America's stock performance from the start of 2007 until today, the stock is still down by roughly 33%! That means a $10,000 investment would have turned into just about $6,666. Ouch! After more than a decade, investors still haven't gotten back to break even.
TD Bank, by comparison, has seen its shares rise more than 190% since the start of 2007. A $10,000 investment here would now be worth around $23,000. While there's no way anyone could have predicted these two outcomes at the start of 2007, there are important differences between the two banks that were clearly on display even then.
Risk aversion
Canadian regulators have long taken a very conservative approach with their country's banking system. For example, the government has been very skeptical of mergers and acquisitions. That's led to a small number of large companies holding dominant positions with little fear that they will be displaced. TD Bank is one of the "upper echelon." Further, there's a general caution in the country when it comes to bank operations, leading to fairly conservative corporate cultures. The same is not true of the U.S. banking market.
Leading up to the Great Recession, many U.S. banks pushed hard into the then-hot mortgage market, leaving them painfully exposed when the housing market crashed, the economy fell into recession, and homeowners defaulted on loans in material numbers. Bank of America's positioning at the time resulted in the bank being forced to cut its dividend to a token penny per share per quarter. That's a level that allows institutional investors with dividend mandates, like pension funds, to keep owning the stock. For individual investors looking to live off of their dividend checks, it amounted to a devastating loss of income.
BAC Dividend Per Share (Quarterly) data by YCharts
For comparison, TD Bank, thanks to its conservative nature, was able to maintain its dividend through the Great Recession. In fact, Canadian regulators wouldn't allow dividend hikes for a time as they wanted to ensure the safety of the country's banking industry. When that ban was lifted, TD Bank quickly got back on the dividend growth bandwagon. All of this helps explain why, when you look back to the last massive financial dislocation, TD Bank has been a much better investment choice. If you had to sum this up in story form, it would be something like the fable in which the tortoise beats the hare.
Still more conservative
To be fair, Bank of America, which offers investors a roughly-2.5% dividend yield, is in a very different place today than it was back in 2007. In fact, the bank seems well positioned to handle a recession if one should occur, as many fear, in 2023. A key gauge of that is the bank's solid Tier 1 Capital Ratio of 11.2% (higher numbers are better on this measure, which indicates how well a bank is prepared to handle adversity). But TD Bank's Tier 1 ratio stands at 16.2%, the second highest in all of North America. So even today, TD Bank is more conservative, which long-term income investors will probably appreciate knowing as they collect its much more attractive 4.1% dividend yield.
