1 Growth Stock to Buy and Hold Forever

When it comes to dividend yields, bigger isn’t necessarily better, and this company proves it.

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

TD Bank logoWhen it comes to dividend yields, bigger isn’t necessarily better.

Case in point: Toronto Dominion Bank (TSX: TD)(NYSE: TD).

Today, Canada’s largest lender by assets yields only 3.4%. That’s the bottom of the barrel among the country’s big banks.

Yet investors who have passed over the stock based on its yield alone have missed out on some phenomenal dividend increases.

It’s this kind of long-term commitment that sets TD Bank apart from most stocks in the marketplace. The company has been able to maintain its payout in good times and bad — it hasn’t missed a dividend payment to shareholders since 1857.

That payout is still growing. Last February, TD Bank hiked its quarterly dividend 9% to $0.47 per share — one of the largest increases in the company’s history. Since the end of the financial crisis in 2009, TD Bank has increased its dividend at the fastest rate of any large bank.

Company

Yield 5-Year Dividend Growth

Royal Bank of Canada

3.80% 7.3%

TD Bank

3.43% 9.0%

Bank of Nova Scotia

3.63% 5.49%

Bank of Montreal

4.07% 1.66%

CIBC

4.12% 2.41%

Source: Google Finance

Over the past 15 years, the bank has increased its dividend by 150%. If you had bought and held the stock over that time, the yield on your original investment would have been 10.7% today.

The key ingredient to this success is the company’s U.S. expansion. Thanks to good old-fashioned Canadian conservatism, TD Bank was well-capitalized heading into the financial crisis. With U.S. banks weakened by bad loans and defaults, the company could quickly build out its U.S. network on the cheap.

Now that bet is starting to pay off. Last quarter, deposits and loans grew 8% and 10% year over year respectively. Net income increased 15% compared to the same period last year, making U.S. retail banking the fastest-growing division within the company.

Investors can count on those gains to accelerate in upcoming quarters. Every economic indicator, like home sales, jobs, auto sales, and housing prices, is improving. That means more mortgages, more credit cards, and fewer defaults.

TD Bank’s Canadian operations are also “firing on all cylinders” according to Tim Hockey, Group Head of the bank’s domestic banking division. With the stock market hitting new highs, the company’s wealth management division is posting strong results thanks to growing mutual fund sales and more assets under management. The bank is still building out its Canadian retail banking with the acquisition of Aeroplan from Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM) last year.

To be sure, not everyone is impressed. Over the past few years, its U.S. operations have struggled to generate returns on capital far north of 6%, and a Canadian real estate slowdown would certainly slow growth.

However, TD Bank’s U.S. expansion is starting to pull its own weight. Last quarter, the division generated a return on equity of 9.1%, which was roughly in line with the bank’s cost of capital. With the country’s economy improving, investors can expect that figure to grow further.

TD Bank has done a lot to mitigate its exposure to any Canadian real estate bubble. Chief Executive Ed Clark has been discussing these risks in the company’s conference calls since 2011. Management has taken a number of steps, including allocating capital away from personal loans to commercial lending and other divisions.

Don’t skip over TD Bank because of its measly payout today. While the stock’s yield is lower than those of its peers, the company has the best growth prospects in the sector. That should mean a growing stream of dividends for income-hungry investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no positions in any of the stocks mentioned in this article. 

More on Investing

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.
Investing

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document
Investing

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane
Investing

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Investing

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »