The Big Five Canadian banks enjoyed a fantastic 2016, but there’s still room to run for this year and beyond. Investors in the Big Five Canadian banks can expect capital gains to go with a fast-growing dividend. You can get the best of both worlds with these fantastic companies and accumulate wealth at an astounding rate over the long term. Any bank in the Big Five is a fantastic investment, but there is one bank that stands head and shoulders above its peers.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one of the most stable dividend-growth stocks that an income investor could ask for. The company has a fantastic risk-management strategy with impressive growth initiatives that will propel the stock and its dividend higher over the course of the next decade.
The company has been aggressively expanding into the U.S. over the past few years. Toronto-Dominion Bank now has more branches in the U.S. than it does in Canada. No other bank in the Big Five has this amount of U.S. exposure.
It’s not a mystery that the U.S. economy is a lot stronger and more stable than the Canadian economy. The Canadian economy is overly sensitive to commodity prices, and this results in a ton of volatility for investors who are overexposed domestically. The U.S. economy is very strong and is about to get even stronger as we head into 2017 with President Trump at the helm.
Donald Trump is pro-business, and his desire to lower corporate taxes and reduce regulations will give a huge boost to the U.S. economy, which will cause the U.S. Federal Reserve to increase interest rates at a faster pace. Both of these trends are huge tailwinds that Toronto-Dominion Bank will ride over the next few years.
The company has an impressive history of dividend raises, and we may see these raises increase in magnitude. Going forward, we could see the dividend being raised by 15% or more thanks to Toronto-Dominion Bank’s impressive U.S. growth prospects and wide economic moat.
The dividend is also safe and will be paid out to shareholders even during the worst of recessions. The risk-management strategy at Toronto-Dominion Bank is top notch.
If a Canadian housing collapse were to happen, the company wouldn’t be affected as harshly as its peers in the Big Five. Toronto-Dominion Bank has 54% of its mortgages insured against a housing collapse by the CHMC. Residential mortgages consist of less than 38% of its total loan portfolio, so even if the housing market did tank, the company would be completely capable of increasing its dividend while some of its peers experience a nasty sell-off.
Toronto-Dominion Bank has always commanded a premium relative to its peers in the Big Five, but I believe the premium should be even larger considering the medium-term catalysts that will propel the stock higher over the next few years. As Warren Buffett said, “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
The stock currently has a dividend yield of 3.3%, which is lower than its peers in the Big Five, but I believe the yield will grow at a much faster pace going forward.
Toronto-Dominion Bank is a truly wonderful company that I believe will outperform its peers in the Big Five over the next decade. If you buy the stock and hold it forever, you’ll become very rich many years down the road.
