There’s no question that Canadians have less choice when it comes to investing than our American counterparts. This can be a good thing in that we don’t have to dig through as many stocks as the Americans. But it also can be a bad thing, as it’s harder to diversify our portfolios, especially considering the fact that the TSX is mostly commodities and financials.
As a Canadian investor, you should have a strong core of your portfolio, and any diversification away from Canada’s commodity-sensitive economy is a must-have. But before we move forward, what are the traits of a core holding?
A core holding is a safe business that has been around for many years with a terrific track record of growing the dividend throughout the years and a durable competitive advantage. A core holding should be a stock that you can hold for the next 30 years without worrying whether or not the company will go bankrupt should there be some market turmoil down the road.
With all this in mind, one stock that should be at the core of every Canadian investor’s portfolio is Toronto-Dominion Bank (TSX:TD)(NYSE:TD). The stock has all the traits of a typical core holding that you can buy shares of and truly forget about for the next few decades.
The business is very well diversified with a very large and growing exposure to the U.S. This is very important and acts as a hedge against the declining loonie, which could stay low for the long term.
Toronto-Dominion Bank is a dividend-growth superstar. The company has a target payout of up to 50%. The company has really improved its free cash flow over the last few years and is one of the best among the Big Five banks. As the earnings increase in the future, you can count on the dividend to grow in sync at a rate of 7-10% annually, according to the management team.
Toronto-Dominion Bank is a fantastic core holding which offers a bountiful yield and safety thanks to a strong U.S. segment. The company also has one of the best risk-management strategies out there, as a Canadian housing collapse or another oil-price rout wouldn’t affect Toronto-Dominion Bank as much as its peers in the Canadian banking scene.
If you’re a long-term investor that seeks a terrific growing dividend, then Toronto-Dominion Bank is a must-buy at current levels. The bank currently yields 3.4% with a price-to-cash flow of just 2.2, which is lower than its five-year historical average value of 3.8. The free cash flow is expected to increase as Toronto-Dominion Bank grows outside its borders.
The stock is quite cheap, and there’s a significant margin of safety right now thanks to strong fundamentals that will see earnings soar next year.
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 Joey Frenette has no position in any stocks mentioned.