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Why Toronto-Dominion Bank (TSX:TD) Is Perfect for Passive Income and Your Portfolio

Investors are always searching for the best stocks to buy. However, the best may already be in your portfolio. Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a proven business that tends to outperform the market and its peers.

TD stock is a core holding in many investors’ portfolios, offering passive income and long-term growth prospects. And it likely fits well in your portfolio.

Time and time again, adding to your winners has proven to be an excellent strategy for long-term outperformance. And we believe continuing to add to winners, such as TD stock, opportunistically will only do good for your long-term returns and boost your passive income.

TD Bank simply outperforms

TD Chart

TD data by YCharts

The above 10-year chart shows TD Bank’s stock price outperformance over its peers.

In the last 20 years, TD Bank has delivered annualized returns of about 10% that was driven by growth in earnings and dividends. In comparison, the Canadian market tends to deliver returns of closer to 7%. To put that in perspective, an initial investment of $5,000 in TD stock 20 years ago would have transformed into more than $33,600 by now.

In the period, TD stock’s dividend has increased by about 11% per year, such that it is eight times what it was in 1999! Your yield on cost would be more than 18%. This means that without lifting a finger, investors from 20 years ago would now be earning more than 18% on their original investment from the dividends alone.

TD stock also offers a yield of 4%, which is a boost of more than 40% compared to the market’s yield of 2.8%.

dividend growth

Income growth and long-term returns

What’s more exciting is that TD Bank’s dividend has lots of room to grow. The bank has a very sustainable payout ratio of about 42%, and it estimates medium-term earnings-per-share growth of 7-10%, which is higher than its peers’.

This leads to estimated long-term returns of about 11% based on a yield of 4% and earnings growth of 7% without accounting for the fact that the stock is relatively cheap right now.

TD stock’s long-term normal price-to-earnings ratio is about 12.1, but at under $74 per share, it trades at about 11.1. Assuming multiple expansion occurs, the quality stock can deliver long-term returns of about 12.7%.

Shareholders can also expect TD’s dividend growth to align with the earnings growth of 7-10%.

Foolish takeaway

TD Bank has built a solid franchise over the years. It has become the sixth-largest bank in North America by total assets and market capitalization. Additionally, it has a leading position in Canada.

The discounted shares are perfect for boosting your passive income and the long-term total returns of your portfolio. At current levels, TD stock can deliver outperforming returns of about 12.7%, which are excellent for a conservative stock like TD.

Investors from all walks of life are encouraged to buy TD stock now and on any meaningful dips for passive income and outperforming returns over the long haul.

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Fool contributor Kay Ng owns shares of The Toronto-Dominion Bank.

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