Banks hold anchor positions in most dividend portfolios, but concerns are building around the weakening Canadian economy, and investors are wondering which bank is the best choice in the current environment.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) come up as top picks right now because they offer investors exposure to revenue generated outside of Canada.
Let’s take a look at both companies to see if one is a better pick.
Toronto-Dominion Bank
Over the past decade TD has invested nearly $17 billion to build an impressive U.S.-based operation. Today, the company owns more than 1,300 branches stretching from Maine all the way down to Florida. The opportunities in the U.S. are significant, but the market is also very competitive and TD has yet to see the same kind of margins it enjoys in Canada.
That could change.
CEO Bharat Masrani says the company now has the scale it needs to compete in the U.S., and the focus will shift to organic growth. TD is in the process of a large restructuring that is designed to drive efficiency across all segments of the business, and the U.S. operation is seeing a lot of those changes.
The U.S. economy continues to recover, and every dollar earned south of the border now translates into CAD$1.30 in earnings. The U.S. government is also expected to increase interest rates by the end of 2015 and that should help relieve some of the margin pressure.
TD pays a dividend of $2.04 per share that yields about 4%. The stock is trading at an attractive 10.5 times forward earnings.
Bank of Nova Scotia
Investors often overlook Bank of Nova Scotia in favour of its larger peers, but that trend could soon change.
Bank of Nova Scotia is betting big on international growth. The core focus is Latin America where Bank of Nova Scotia has spent more than US$7 billion on acquisitions in the past five years. Management sees huge long-term opportunities in the region, with specific attention being placed on Mexico, Colombia, Peru, and Chile.
These four countries make up the core of the Pacific Alliance, a trade bloc created to enable the free movement of capital and workers among the member states.
More than 90% of trade barriers have been removed between the countries and the stock markets have already been integrated.
As companies move into new markets they need extra financial services. Bank of Nova Scotia has a strong presence in each of the member countries and that gives it an advantage as the markets continue to integrate.
The retail opportunities in Latin America are also compelling. More than 200 million people live in the trade bloc and demand for credit cards and investment products should rise as the middle class expands.
Bank of Nova Scotia pays a dividend of $2.72 per share that yields about 4.5%. The stock currently trades at just 10.1 times forward earnings.
Which stock should you buy?
Both stocks are solid long-term investments and offer safe dividends. TD is certainly larger and probably comes with a bit less risk, but you give up some yield for that extra security.
