Does Toronto-Dominion Bank Belong in Your Portfolio?

Because of its strong and growing exposure to the United States, I believe Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a buy.

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For banks that are focused almost entirely on the Canadian economy, these times have been rough. However, for banks that are more international–even if that just means south of the border in the United States– there are still plenty of growth opportunities.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD), commonly called TD Bank, is one of the 10 largest banks in the United States. And because of this growing exposure in the United States, it now generates a significant chunk of its earnings from the U.S.

Its third-quarter adjusted net income was $2.29 billion, which was a 4% increase year over year. Its Canadian business earned $1.6 billion and its American business earned $450 million. Its U.S. retail division grew by 24% year over year. The primary reason it is seeing this growth is because the U.S. economy is relatively strong, resulting in increased demand for loans.

Significant growth opportunities exist

There are a couple of growth opportunities that exist for TD Bank that should have many investors excited for the future.

First and foremost, there’s the fact that the U.S. Federal Reserve will have to raise interest rates at some point. When this happens, it will increase the potential margins that TD can work with when charging interest to customers. That will help to increase profitability.

The other area of growth is through credit cards. In 2013, TD acquired the entire consumer credit card portfolio from Target Corporation for US $5.7 billion. It also will underwrite, fund, and own future credit cards for the retailer for seven years. This gives TD access to a significant amount of interest for it to generate revenue.

In May, it also agreed to buy Nordstrom Inc.’s credit card portfolio, which totals about US$2.2 billion. While smaller than Target, these two companies add an additional US$9 billion to TD’s credit card portfolio, allowing it to grow its interest revenue via credit cards.

For TD, a strong U.S. economy is what it will take for the bank to continue generating significant revenue and growth. All of this translates into what I believe is one of TD’s best qualities.

Strong dividend growth

Every year since 2010, the bank has hiked its dividend. This shows is that TD is not only growing, but it is passing that growth over to its investors. Even better, its payout ratio is less than 50%, which ensures that the bank will continue to be able paying. At today’s price, the yield is 3.75%. That comes out to a quarterly dividend of $0.51.

Unfortunately, it is very hard to find high-quality dividend stocks. TD Bank, in my opinion, is one of the best ones because it is lucrative, secure, and growing. So long as the bank continues to grow, I expect the dividend to follow.

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 Jacob Donnelly has no position in any stocks mentioned.

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