Royal Bank of Canada vs. Toronto-Dominion Bank: Which Is the Better Bet?

Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are Canada’s largest companies. But which one should you add to your portfolio?

| More on:
The Motley Fool

Royal Bank of Canada (TSX: RY)(NYSE: RY) and Toronto-Dominion Bank (TSX: TD)(NYSE: TD) are Canada’s two largest companies and many investors opt for their stocks when building their first portfolio. But which is the better option?

Below we take a look at both sides of the argument. First, we make the case for RBC, then for TD. Finally, we deliver a verdict.

The case for RBC

Put simply, RBC is firing on all cylinders. Its Canadian business is arguably stronger than each of its peers – its branch and ATM network is the largest in the country, and the bank has a top two position in every Canadian banking product. This scale makes RBC especially profitable in Canada and Canadians have gradually become more loyal to their bank in recent years, so RBC’s position appears relatively safe.

Internationally, RBC’s wealth management and capital markets businesses are also performing well. This is really part of the legacy of ex-CEO Gordon Nixon, who decided to focus on these areas at the expense of U.S. banking. So unlike TD, which is struggling in the ferociously competitive U.S. banking industry, RBC is making gains in its businesses while others are retreating.

RBC shares are also cheaper than TD’s, trading at 13.4 times earnings compared to over 15 times for TD. As a result, RBC shares also have a slightly higher dividend yield of 3.5%, compared to 3.3% for TD. And a bonus: RBC is also slightly better capitalized. So why would anyone choose TD?

The case for TD

First of all, TD also has a top position in Canadian banking. And TD’s market share is arguably more secure, since the bank consistently ranks ahead of its peers for customer satisfaction. Profitability is not a problem in the home market, where return on equity exceeded 40% last year.

TD also has a great track record in risk management, an area where the bank is very well-respected. Most notable was the decision to exit the subprime market in the United States, before those products blew up.

That kind of track record, plus TD’s focus on retail banking, arguably makes the bank much lower risk than RBC. While RBC focuses on capital markets (a business with uncertain risks and little transparency) and wealth management (whose fortunes are tied to the stock market), TD’s focus on retail banking should lead to less volatility.

Furthermore, TD’s emphasis on the United States gives the bank plenty of room to increase earnings. Right now the environment there is not ideal, but as rates rise, and the economy continues to recover, TD stands to benefit as it grows its presence south of the border.

The verdict

At this point, RBC probably makes for a slightly better option. But both companies are solid options for your portfolio, and it’s not a crime to buy either of their shares.

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 Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »

TFSA and coins

5 Canadian Stocks With a Real Chance of Tripling Your TFSA’s Value

TFSA balances can triple in value with five Canadian stocks that have delivered outsized gains in recent years.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

This 8% Dividend Stock Pays Cash Every Month

Earn monthly cash of $154 with this 8% dividend stock.

Read more »

A miner down a mine shaft
Metals and Mining Stocks

Should Investors Buy the Correction in Lundin Mining Stock?

Lundin (TSX:LUN) stock has fallen by 10% in the last few weeks, but so has the price of copper. Coincidence?…

Read more »

Metals and Mining Stocks

Best Stocks to Buy in May 2024: TSX Materials Sector

A TSX materials sector ETF could help investors gain cheap diversified exposure to the hot sector's stocks – so will…

Read more »

man is enthralled with a movie in a theater

Should You Buy Cineplex While it’s Below $9?

With analysts expecting a significant recovery in the second half of 2024, is this the last chance to buy Cineplex…

Read more »