The fear of recession is forcing investors to sell their banking stocks and move to safe havens. That rationale isn’t hard to understand: banks’ fortunes are closely tied with the economy. As growth slows or contracts, so too does the lending business, which is the bread-and-butter for banks.
In this uncertain environment when many economic signals are flashing red and growth is slowing globally, investors are dumping their bank stocks. That trend hasn’t spared some of the top Canadian banks, which have rock-solid balance-sheets and a little risk of going under.
If you are one such investor who is sitting on the sidelines to wait for a better time to buy these stocks, the chances are that your moment to strike is probably getting closer.
Among the top five Canadian banks, I am particularly focusing on Toronto-Dominion Bank (TSX:TD)(NYSE:TD), whose stock has fallen more than 5% during the past one month.
The main reason I like TD Bank is that it’s been very consistent in rewarding investors through steadily growing dividends, offering about 40-50% of its income each year in payouts.
Generous payouts
This generous dividend policy is a great incentive for investors who want to remain invested and earn a regular flow of income on their investments. TD’s ability to generate cash for its investors is supported by strong growth momentum, and TD’s significant retail-banking operation in the U.S.
You may be surprised to know that TD has more retail branches in the U.S. than in Canada, with a network that stretches from Maine to Florida.
In the most recent earnings, TD reported that the U.S. retail division posted a 29% growth in earnings to a record $1.26 billion.
Overall, TD roughly generates about 30% of its net income from the U.S. retail operations. The bank also has a 42% ownership stake in TD Ameritrade with a fast-expanding credit card portfolio.
After a 10.4% increase in its payout in February, income investors in TD stock now earn a $0.74-a-share quarterly dividend, which translates into a 4% yield on yearly basis.
This return has become more attractive since the yield on government bonds has begun to slide. For example, the yield on the U.S. 30-year Treasury note fell below 2% on August 14 for the first time, signalling a persistently low-rate environment.
The bank is forecast to grow its dividend payout between 7% and 10% each year going forward — an impressive growth rate and enough to beat inflation.
Bottom line
In the past five years, TD has proven to be a much better investment when compared to the benchmark index, producing returns more than 25%. The S&P/TSX Composite Index rose just under 4% during the same period.
If TD Bank stock price continues to fall, it could offer a more attractive opportunity for dividend investors to lock in a higher yield.
