Although the macro environment for Canadian financials does not look as good as it did last year when we were expecting interest rate increases, bank stocks are still core holdings for investors’ portfolios.
Core holdings because of their dividends and because of their stability and their resilience.
I mean, the banks have had many years of profitable growth, and shareholders have come to rely on them for dividend payments as well as for capital gains.
While the best times are probably behind them for now, they remain critical due to the reliable dividend income that they provide for shareholders at attractive payout ratios today and in the future.
Let’s take a look at two Canadian bank stocks, both of which have their own investing merits, in an attempt to figure out which one is the better buy today.
Toronto-Dominion Bank (TSX: TD)(NYSE: TD)
In the last 10 years, TD Bank has increased its dividend by a compound annual growth rate (CAGR) of 9.4%, the highest among its peer group, to today’s dividend of $2.96, a 3.95% dividend yield.
45% of its revenue comes from Canadian operations, with the remainder coming from the U.S.
While there is the potential for a slowdown in Canada, TD Bank is well positioned for this scenario.
Probably one of the best positioned in fact, due to its significant deposit volume and banking presence.
Currently trading marginally below one year ago levels, TD bank stock price has not come down far enough to compensate us for the risk of a slower growth Canadian business and an interest rate environment that will see steady or even lower rates going forward.
Bank of Nova Scotia (TSX: BNS)(NYSE: BNS)
In the last 10 years, Bank of Nova Scotia has increased its dividend by a CAGR of 6% to today’s dividend of $3.48, a 4.8% dividend yield.
As the most diversified bank, Bank of Nova Scotia stands to benefit from its increasing wealth management exposure and its large international presence, which has higher growth rates.
While the bank’s presence in emerging markets can make some investors nervous, I think that it is this very quality that makes it a good bet going forward.
As discussed, the Canadian market can be expected to see a slow down, so that banks with a bigger exposure to markets outside of Canada are exposed to higher growth rates.
Currently trading below $72.48 at writing, or 11% lower versus one year ago, this may be a good time to pick up some shares in this geographically diversified Canadian bank.
