Should Toronto-Dominion Bank Be Your Top Dividend Pick Right Now?

Here’s what investors should know before buying Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

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Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a long-time favourite among dividend fans, but the current headwinds facing the Canadian economy have some investors wondering if this is a safe time to start a position in the stock.

Let’s take a look at TD to see if it deserves to be in your dividend portfolio today.

Earnings situation

TD wrapped up its third quarter at the end of July, and the numbers came in pretty good. Adjusted net income hit $2.29 billion, or $1.20 per share, which was 4% higher than the same period last year.

The stability can be attributed to TD’s strong retail operations on both sides of the border.

In Canada, the retail group earned $1.6 billion, an 8% increase over Q3 2014. TD’s Canadian retail franchise is arguably the best in the country. Every customer-facing employee is a well-trained sales machine, always on the lookout for opportunities to help clients boost their borrowing, open new accounts, or buy investment products.

Some customers might find it a bit much, but investors love it.

TD also has a very large U.S. operation with more than 1,300 branches running from Maine right down to Florida.

A little more than a decade ago, the company had almost no American retail presence, but after spending $17 billion and putting in a lot of hard work, TD finds itself ranked among the top 10 banks in the United States.

The growth has been incredible and the earnings results are improving, but there is still room for improvement, and investors should see better margins in the coming years as TD focuses on reducing costs and growing the U.S. business organically.

The U.S. retail operations brought in $450 million in the third quarter, about the same as the same period last year.

TD’s wholesale operations earned $239 million in Q3, up an impressive 11%. This group focuses on the capital markets segment, which can be more volatile than the retail side of the business.

Dividends

TD pays a dividend of $2.04 per share that yields about 3.9%. The distribution is very safe, and investors should see continued dividend growth in the coming years, although the size and frequency might drop a notch if economic headwinds persist.

Loan risks

The Canadian banks have pulled back this year amid concerns that the Canadian economy might be headed for a lengthy slowdown. The result of a prolonged recession could be higher unemployment and a sharp pullback in the housing market.

TD has $241 billion in Canadian residential mortgages on its books. Insured loans represent 57% of the portfolio and the loan-to-value ratio on the rest is 59%.

Based on those numbers, the housing market would have to drop sharply before TD sees any material impact. Most analysts expect a slow pullback in house prices rather than a steep and quick decline.

On the energy front, TD has less than 1% of its overall loan book exposed to oil and gas companies, so there is little concern there.

In the event that another big financial shock hits the market, TD is in a good position to ride it out. The company has a CET1 ratio of 10.1%, which means it is very well capitalized.

Should you buy TD?

The stock currently trades at 12.3 times trailing 12-month earnings, which is significantly lower than the five-year average of 13.7.

If you want a conservative pick in the bank space and are happy with a safe dividend yield of nearly 4%, TD is a good long-term bet right now.

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 Andrew Walker has no position in any stocks mentioned.

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