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Toronto-Dominion Bank: The Right Time to Buy?

Owning successful bank stocks is often a great way to generate lucrative returns on investment both via stock appreciation as well as generous dividends. And investors can benefit quite handsomely from owning Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

The growth the company is showing proves that.

In Q3, TD Bank generated $8.7 billion in revenue–up $700 million year over year and blowing past analyst expectations of $8.08 billion. Adjusted net earnings were $2.42 billion, or $1.27 per share, which, again, beat analyst expectations of $1.21.

In Canada, TD Bank saw its net income drop from $1.6 billion to $1.5 billion, but it blamed this on higher insurance claims due to the Fort McMurray wildfires. And in the wholesale banking division, TD Bank increased net income by 26% thanks to higher originations in the debt and equity capital markets. All in all, the Canadian arm is doing okay.

It’s U.S. operations, on the other hand, continue to grow aggressively. All told, this division had net income of $788 million–up $114 million year over year. On the retail side, its net income rose by 14%. And then there’s its consumer brokerage firm, TD Ameritrade, which it owns 41% of. This saw net income grow by 36%.

TD Ameritrade is important because it was announced last week that both TD Ameritrade and TD Bank would be buying Scottrade for US$4 billion. Essentially, TD Ameritrade will get all of Scottrade’s brokerage assets, and TD Bank will get all of Scottrade’s bank assets. TD Ameritrade believes that by combining with Scottrade, it can save US$450 million annually.

According to the press release, Scottrade Bank’s tangible book value was US$41.3 billion, and it had US$13 billion in cash and securities, US$4 billion in loans and leases, and US$15 billion in sweep deposits. The impact this acquisition will have on the bank remains unknown because we don’t know how profitable it was for Scottrade. However, I expect this deal to be lucrative for both TD Bank and TD Ameritrade.

One concern investors often have is that there are risks in owning banks.

TD Bank has 53% of its loan portfolio insured, meaning home prices would have to absolutely tank for the bank to be severely harmed. There is little evidence to support the worry that the housing market is at risk. And, in the oil and gas business, which is actually improving, TD Bank only has 1% of its loan book invested.

There is one true negative to TD Bank: many people also believe it is a great bank to own; therefore, it is more expensive than the other banks in the market with a P/E ratio of 13.65.

However, because the risks are so low in comparison, that might not be a terrible price to pay for a company that kicks off dividends the way TD Bank does. It currently pays $0.55 per share with a 3.64% yield. Management increased the dividend by 8% back in January, so if earnings continue to improve, I expect the dividend will follow.

All in all, TD Bank is doing all the right things to be in a position to dominate for quite some time. If the dividend is what you care about, this stock is worth it.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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