The U.S. banking crisis in the early part of 2023 should have been a wake-up call to investors. More often than not, taking a safety-first approach with dividend stocks is a better plan than focusing on the highest yield or the most exciting story. Today, if you are looking at dividend-paying banks, two enticing names are Toronto-Dominion Bank (TD 0.46%) and Bank of Nova Scotia (BNS 0.71%). An example of a bank that may be best avoided, meanwhile, is Premier Financial (PFC -1.64%).
Up north
One of the biggest differences between U.S. banks and Canadian banks is the amount of regulation they face. Simply put, Canada is far more strict. That permeates the large Canadian banks, a list that includes Toronto-Dominion, or TD, and Bank of Nova Scotia, or Scotiabank. The conservative nature of the banks is both a domestic and foreign thing, since these two Canadian banks, and many others, have exposure outside of their home market.
But what's really interesting is that Canada has basically created an elite group of large banks by, effectively, limiting the ability of banks to grow via acquisition. Both TD and Scotiabank are in the top tier of the Canadian industry and, thus, have well-entrenched and protected business foundations in Canada. That's a solid base from which to grow that U.S. banks, with a looser regulatory framework, can't replicate.
Meanwhile, TD Bank has expanded its U.S. presence to become one of the largest regional banks in the market. It is largely focused on the East Coast, as well, so there's plenty of room for geographic growth ahead. The bad news is that a recent merger was scuttled because of regulatory pushback, but even in the face of this adversity, TD Bank can still grow. It just shifted from buying growth to building from within, with plans to open 150 new branches between now and 2017.
Now add the highest Tier 1 Capital ratio in North America (15.3%), and you have a rock-solid bank with a clear growth path ahead. (Tier 1 ratios are a measure of a bank's ability to withstand adversity, with higher numbers better than lower ones.)
TD Bank offers investors an attractive yield of roughly 4.9%. An even higher yield can be found in Scotiabank, which is offering 6.3%. (For comparison, the SPDR S&P Bank ETF has a yield of 3.7%.) The higher yield is a reflection of higher risk, but it is a different kind of risk because Scotiabank's geographic growth plans focus on South America and not the United States. In fact, while U.S. banking stocks were cratering in early 2023, Scotiabank's shares were basically unaffected. With little U.S. exposure, why would they be?
Scotiabank's Tier 1 ratio was a very solid 12.3% in the most recent quarter. And while investors do have to consider the risk of investing in emerging markets, the events in the U.S. suggest that, perhaps, a little geographic diversification might not be a bad thing to add in the banking sector. Meanwhile, Scotiabank has paid dividends consistently since 1833. Clearly, the bank places a huge importance on returning cash to shareholders.
The U.S. conundrum
The comparatively light regulation in the United States, relative to Canada, creates a market where a bank can grow quickly. But there are also a lot of small players, of which Premier Financial is just one example. It has a yield of roughly 7.5% today, higher than either TD or Scotiabank. Its Tier 1 ratio, meanwhile, was lower at 10.4%, suggesting that it will be less robust to adversity.
Premier appears to have taken the early 2023 U.S. banking troubles in relative stride (total deposits only fell 2% year over year in the first quarter). But investors are clearly worried about the future, pushing the stock down nearly 40% so far this year.
You could argue that there's turnaround appeal here, but it comes with more competitive risks given the tiny bank's small scale. It has just 74 branches in five U.S. states; TD is planning to grow by twice that number of branches over the next few years. And, notably, during the Great Recession Premier Financial cut its dividend, a shareholder-unfriendly act which neither TD nor Scotiabank needed to do.
Relatively attractive
To be fair, there are worse banks out there than Premier Financial. It is merely a somewhat middle-of-the-road example of a small U.S. regional bank with a high yield. Notably, it also has a lower Tier 1 ratio than either TD or Scotiabank. You could opt for a larger U.S. bank, but most of the choices there have similar or lower yields compared to TD or Scotiabank.
In other words, if you are trying to find a high-yield bank stock, without taking on too much risk, going north to Canada looks like a solid call.
