If you are an income-focused investor, Bank of America's (BAC -0.21%) 3.3% dividend yield will probably look pretty attractive since it is toward the high end of the stock's yield range over the past decade. But that's looking at this bank in isolation. If you compare Bank of America to another bank like Canadian giant Toronto-Dominion Bank (TD 0.46%), it doesn't seem quite as attractive anymore.
Bank of America is not a bad bank
Nothing here is meant to suggest that Bank of America is somehow a bad bank. Quite the contrary, it is probably one of the most respected banks in the world. But that doesn't mean it is a good investment. That said, using yield as a rough gauge of valuation, the stock does look like it is the cheapest it has been in many years. Fast-rising interest rates and a couple of bank failures in early 2023 are part of the reason for this.
However, investors looking for a reliable income stream need to go back further to fully understand the risks. Notably, Bank of America got caught up in the financial panic that led to the Great Recession. It ended up cutting its dividend, which still isn't back to pre-cut levels. The stock price is also below pre-cut levels. The bank is clearly different today than it was back then, but pulling back to examine its longer-term history should still leave dividend investors with some concerns.
By comparison, Toronto-Dominion Bank has a yield of 4.5%. And it maintained its dividend, paid in Canadian dollars, throughout the Great Recession. A higher yield and a better dividend history suggest that this stock is worth a closer look if you are considering Bank of America.
TD Bank is a better choice on multiple fronts
One of the key strengths of TD Bank, as the Canadian financial giant is more commonly known, is its conservative nature. That's driven by its country of origin, since the Canadian banking industry is highly regulated. For example, the country's banks weren't allowed to increase their dividends during the Great Recession. After that prohibition was lifted, however, TD Bank got right back to dividend growth. The bank's Canadian operations provide a solid foundation for long-term growth.
That growth is largely coming from TD Bank's expansion in the United States, where Bank of America is already a dominant name. There are two things to consider here. First, TD Bank's conservative ethos runs across its entire operation. That's true even though U.S. regulations tend to be less restrictive. To put a number on this, TD Bank's Tier 1 Capital Ratio, a measure of how well prepared a bank is for adversity, is higher at 15.2% than that of any other bank in the region. Bank of America's Tier 1 ratio is 11.6%, which is strong but notably lower.
Second, unlike Bank of America, which has a coast-to-coast footprint, TD Bank is largely an East Coast operation. That means it has ample expansion opportunities ahead of it as it broadens its store base. Still, TD Bank is the sixth-largest bank in North America by total assets, so it is hardly a small fry. That means it can handily compete with Bank of America even though it is a smaller player in the U.S. market.
Maybe Bank of America isn't the best choice
Thus TD Bank is offering a higher yield, is financially stronger, and has more growth opportunities ahead of it. If you are looking at Bank of America thinking you are getting a great deal, you should step back and consider other options. There might be better choices, like TD Bank, just waiting to be added to your portfolio.
