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Should Dividend Investors Buy Toronto-Dominion Bank or Royal Bank of Canada?

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Royal Bank of Canada (TSX:RY)(NYSE:RY) recently surprised the markets with strong earnings reports and dividend increases.

This wasn’t supposed to happen. Most pundits were expecting the banks to deliver weak results, especially after the companies themselves had warned the market that margin pressures and headwinds would lead to slower growth in 2015.

Shares of the banks had been on a six-month slide, but short sellers decided to book some profits and new investors are now wondering if it’s time to hop on board.

Let’s take a look at Toronto-Dominion and Royal Bank to see if one deserves to be in your portfolio.

Toronto-Dominion Bank

Toronto-Dominion reported Q1 2015 net income of $1.4 billion, an 8% year-over-year increase compared to Q1 2014. TD’s Canadian retail operations continue to chug along at a profitable clip, supported by strength in the insurance and credit card businesses.

The company also operates more than 1,300 branches in the U.S., where a focus on in-branch growth is starting to pay off. The U.S. retail division stole the show in Q1, contributing US$536 million to net income. This was a 15% increase over the same period a year earlier. Mike Pederson, the top boss for the U.S. group, said strong deposit and lending volume, active productivity management, and new customer acquisitions have driven the organic growth.

The company’s wholesale banking group was the weak link in the first quarter, with net income dropping 17% compared to Q1 2014.

Toronto-Dominion’s CEO, Bharat Masrani, has consistently warned that difficult times are on the horizon, but his decision to increase the quarterly dividend by four cents per share suggests he is confident that profits are going to continue to grow over the long term.

TD pays an annualized dividend of $2.04 per share that yields about 3.8%. The company has increased the dividend by 70% over the last five years.

Royal Bank

Royal also delivered solid Q1 2015 earnings. The company enjoyed strong performances from insurance, wealth management, capital markets, and the Canadian personal and commercial banking unit.

Royal’s reliance on the more volatile business units to power its revenue growth concerns some analysts, but the strategy continues to deliver results.

Royal also just announced a US$5.4 billion deal to purchase U.S.-based wealth manager City National. The acquisition will provide a solid platform for Royal to drive long-term growth in the asset management space.

On the Canadian side, the company reassured investors that its exposure to Alberta is not showing any signs of distress, and the company is comfortable with its risk profile, even when stress tested against lower oil prices, an Albertan recession, higher unemployment, and a Canadian housing downturn.

Royal Bank increased its quarterly dividend by two cents. The company pays an annualized dividend of $3.08 per share that yields about 4%. Royal has increased the dividend by more than 50% in the past five years.

Which should you buy?

Toronto-Dominion and Royal Bank both currently trade at about 11.2 times forward earnings. Toronto-Dominion is more reliant on retail operations to drive revenue growth and this tends to be a more stable business. At this point, I would tip my hat to Toronto-Dominion.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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