Toronto-Dominion Bank and Royal Bank of Canada to Benefit From Rising Interest Rates

With strong capital ratios and positive exposure to rising interest rates, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Royal Bank of Canada (TSX:RY)(NYSE:RY) are top dividend stocks.

| More on:
win

Although at the latest meeting, the Bank of Canada opted to keep the benchmark interest rate at 1.25%, this level represents a 75-basis-point increase from 2017 levels, which is a big move.

And going forward, we can expect more interest rate increases, as the economy is strong, and inflation is pushing onto the Bank’s target level.

Consumers have felt the pinch already, largely due to mortgage rate increases, and will continue to feel it as their mortgages are renewed at higher rates. With lower disposable income, consumers will be spending less on their “wants” out of a necessity to ensure that they have enough money for their needs.

This, in turn, will affect retail stocks and certain auto stocks, as consumers hold on to their cars for longer periods of time, as well as any company/stock that benefits from consumer discretionary spending.

Back to interest rates.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a beneficiary of rising interest rates, and the stock has risen in the last few weeks as a reflection of this.

And while delinquencies may go up with rising rates, the bank will profit from a widening spread. A 25-basis-point increase in interest rates would increase the bank’s net interest income by approximately $150 million.

With $1.2 billion in total assets, TD bank is currently Canada’s biggest bank, with the most assets and the second-most deposits.

TD Bank stock has been a good place to turn to for dividends and dividend growth, and since 1995 the bank’s dividend has grown at an annualized rate of 11%.

In the latest quarter, the first quarter of 2018, the bank increased its dividend by 12% to $0.67 per share, and the bank’s efficiency ratio continued to impress, declining 290 basis points in the first quarter of 2018 to 53.2%, as all segments of the banks are showing good cost control.

TD Bank stock’s dividend yield is currently at 3.65%.

Royal Bank of Canada (TSX:RY)(NYSE:RY) is also set to benefit from rising interest rates and a widening spread, yet the stock has fallen almost 10% year to date.

The bank is also having a very strong start to the year and had a strong 2017, with a 3% dividend increase to $0.94 per share and a share buyback of nine million shares a testament to this strength.

Royal Bank stock has a current dividend yield of 3.8% and maintains its place as an attractive dividend stock.

Credit risk is elevated for the banks in general, with rising interest rates, and given Canadians’ heavy debt load, but with strong capital ratios and the benefits that rising rates bring to the banks’ bottom lines, investors needn’t be worried about it too much.

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 Karen Thomas has no position in any of the stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »