Canadian investors are searching for top-quality dividend stocks to add their TFSA portfolios.
The strategy makes sense for millennials who are starting a retirement savings fund, especially when the distributions are used to buy new shares. Retirees and other income investors can also take advantage of the tax-free status of the TFSA to pocket the full value of their dividends.
Let’s take a look at Toronto-Dominion Bank (TSX: TD)(NYSE: TD) to see if it is an attractive choice today.
Earnings
TD reported fiscal Q2 2018 adjusted net income of $3.06 billion compared to $2.56 billion in the same period last year. Yes, TD pulled in a cool $1 billion per month in profits.
The Canadian retail banking segment saw reported earnings jump 17% on a year-over-year basis, and the U.S. retail segment delivered a 16% gain. The bank’s wholesale banking group also had a solid quarter, reporting earnings growth of 8% compared to fiscal Q2 2017.
Overall, TD continues to deliver results that are above the company’s medium-term guidance of earnings-per-share (EPS) growth of 7-10%.
U.S. operations
TD is primarily known for its Canadian business, but the company has invested billions over the past decade to build a strong American presence. In fact, TD now has more branches located south of the border than it does in the home country. This provides a nice hedge against any potential downturn in the Canadian economy.
Housing risk
Rising interest rates could force some homeowners to sell their properties when the time comes to renew their mortgages. If a wave of homes hits the market at the same time, prices could drop more than expected, and this would be negative for the banks.
TD finished fiscal Q2 2018 with $269 billion in mortgages on the books. Insured mortgages represent 39% of the portfolio, and loan-to-value ratio on the uninsured loans is 52%. This means house prices would have to fall significantly before TD takes a material hit.
Dividends
TD has a 20-year compound annual dividend-growth rate of better than 10%. The company raised the payout by 11.7% earlier this year, so management is obviously comfortable with the revenue and earnings outlook.
At the time of writing, TD’s dividend provides a yield of 3.6%.
Returns
Long-term investors have done well with this stock. A $10,000 investment in TD just 20 years ago would be worth more than $80,000 today with the dividends reinvested.
Should you buy?
A downturn in the Canadian housing market should be expected, but TD is capable of riding it out, and higher interest rates tend to be a net positive for the banks.
If you are looking for a top dividend pick for your TFSA, TD deserves to be on your radar.
