Is Toronto-Dominion Bank (TSX:TD) Stock a Safe Buy?

Toronto Dominion Bank (TSX:TD)(NYSE:TD) is often cited as a top stock pick. Is that still the case in the current environment?

| More on:
Bank sign on traditional europe building facade

Image source: Getty Images

Equity markets continue to serve up surprises.

At the end of 2018, it looked like we were headed for a major crash, yet four months later the stock markets have tested new all-time highs. The extent of the 2019 rally caught most people off guard, and investors should expect to see another dip in the near term, given the size of the run-up.

In preparation for the next pullback, investors are trying to figure out which stocks might be attractive picks for their portfolios.

Let’s take a look at Toronto Dominion Bank (TSX:TD)(NYSE:TD) to see if it deserves to be on your buy list in the current environment.

Bank uncertainty

All the headlines pointing out big short positions in the Canadian banks or predictions of a 20% sell-off for the sector might make investors think twice about buying shares of the country’s top financial institutions.

One concern that regularly comes up is the level of debt being carried by the average Canadian. The amount of money Canadians owe as a percentage of their disposable income is near a record high, and this has the potential to cause the banks some grief if defaults escalate, especially in the housing market.

In the case of TD, the mortgage portfolio was $281 billion at the end of fiscal Q1 2019. That sounds a bit scary, but 34% of the portfolio is insured and the loan-to-value ratio on the uninsured loans is 53%. As a result, house prices would have to fall significantly before TD has to worry about meaningful losses.

Government efforts to cool off the rate of price increases in overheated markets appear to be working. At the same time, mortgage rates are starting to pull back after a surge caused by two years of interest rate increases. The end result is that fewer new buyers are taking on dangerous levels of housing debt and those that already have mortgages should see more favourable renewal rates. Overall, this should reduce the risk of a crash in the residential property market.

U.S. business

TD has a large U.S. business that provides a nice hedge against any potential trouble in Canada. The unemployment rate in the United States is at its lowest level in decades, and while an inverted yield curve in the bond market has sparked recession fears, TD should see the good times continue.

The strengthening U.S. dollar against the loonie also provides a decent boost to earnings when the American profits are converted to Canadian dollars.

Dividends

TD has a great track record of dividend growth, and that should continue in line with expected annual earnings-per-share gains of 7-10% over the medium term. The current payout provides a yield of 3.9%.

Should you buy TD?

The stock has gone through some volatility in the past year, and investors should probably expect more near-term swings. A 20% move in a matter of months wouldn’t be a surprise, but it also shouldn’t be feared. TD traded for $80 last September. By late December, it was down to $65. Investors who had the courage to buy at that point are sitting on some nice gains. At the time of writing, TD trades at $76.

TD is a solid company with a balanced revenue stream. Based on the long-term performance and the earnings-growth expectations, any meaningful short-term dip in the stock should be viewed as a buying opportunity for investors who plan to own TD stock for the long haul.

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 Andrew Walker has no position in any stock 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 »