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Toronto-Dominion Bank: The Best Bargain of the Big 5?

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one of the best dividend-growth stocks to have as a core holding. Shares of TD Bank have historically traded at a slight premium to its peers in the Big Five, but this valuation gap has shrunk of late thanks to a number of short-term concerns.

The Canadian banks surged last year, so it’s only natural that a correction would happen eventually. Did the big banks get ahead of themselves? Perhaps, but all the big banks weren’t trading at absurd valuations at their peaks; they were actually fair valued.

Since the debacle over the CBC’s report on tellers up-selling customers to meet unrealistic targets, TD Bank has taken a significant plunge and is now down over 9% from its 52-week high, which is a larger discount than many of the other Big Five banks right now.

Here’s why TD Bank is my favourite high-yield, dividend-growth stock and why you should probably consider picking up shares today while they’re cheap.

Strong, growing U.S. segment will ride major tailwinds

TD Bank has a huge U.S. presence relative to its peers, which I believe will be the major driver of growth that will support the highest magnitude of dividend growth relative to its Big Five peers over the next few years. TD Bank isn’t done with its U.S. expansion initiatives, and going forward, we can expect the management team to find more opportunities to beef up its U.S. segment.

Retail banking focus produces a “higher-quality” earnings stream

The management team is focused on retail banking, which gives a “higher-quality” earnings stream since they’re usually considerably less volatile over the course of the long term. Although volatility is nothing to be afraid of, predictability usually implies a premium, and I believe such a premium should exist for a bank with such top-notch retail banking assets. Warren Buffett loves businesses with a more predictable stream of future earnings, and, as he once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Worried about a recession? Hang on to your shares!

Another reason to love TD Bank is because of its ability to weather the storm in the event of a recession. I believe the risk-management strategy of TD Bank is superior to its peers in the Big Five, and once the next correction comes, it’s likely that TD Bank will be one of the quickest to recover, while its solid dividend remains intact. A smart strategy would be to buy more shares on the way down while the general public dumps theirs.

Valuation

Shares trade at a 12.65 price-to-earnings multiple, a 1.7 price-to-book multiple, a 2.6 price-to-cash flow multiple, all of which are lower than the company’s five-year historical average multiples of 13, 1.8, and three, respectively. The dividend yield is also considerably higher than historical averages at 3.75%.

Bottom line

I believe TD Bank is best positioned to grow its dividend by the largest amount over the next decade and is best equipped to cope during the next recession. Shares are trading at a slight discount right now, but given the tailwinds, I think shares are a bigger bargain than traditional valuation metrics would indicate. Smart long-term investors should strongly consider initiating a position at current levels.

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Fool contributor Joey Frenette owns shares of Toronto-Dominion Bank.

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