The Safer High-Dividend Bank Stock for Your TFSA

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) earnings missed analyst estimates, but that didn’t seem to bother confident shareholders on Thursday.

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Canadian Western Bank (TSX:CWB), Laurentian Bank of Canada (TSX:LB), and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) all announced earnings on Thursday.

Out of the three banks, Toronto-Dominion Bank provides investors with higher risk-adjusted returns than Canadian Western and Laurentian.

TD CEO Bharat Masrani commented on the uncertain macroeconomic environment: “As we head into the final quarter of the year, the macroeconomic environment has become less supportive. With the strength of our franchise and the investments we’ve been making in our capabilities, I am confident in our ability to continue meeting our customers’ needs while delivering value for shareholders.”

Tax-Free Savings Account (TFSA) investors should not worry about adding high-yielding bank stocks to their portfolio. Despite the trade war volatility and recession concerns, TD Ameritrade, among other leading Canadian banks, is well prepared to handle any global economic concerns.

Canadian Western Bank

Canadian Western Bank popped almost 2% on market open after declaring earnings per share of $0.81 for the quarter ended July 30. Investors were excited to hear that the bank had decided to raise the quarterly dividend to $0.28 per share.

Even after the dividend hike, the yield on Canadian Western’s dividend at the current price of almost $32 per share is only 3.4%, far less than many less risky competitors. A primary indication of preparedness, the Basel III leverage ratio for Canadian Western is far lower than peers at 8.3%.

The Basel III leverage ratio is a leverage ratio which divides capital by the bank’s total consolidated assets. Risk exposure comes from a drop in the price of the assets harming the solvency of the bank.

Laurentian Bank of Canada

Laurentian Bank of Canada fell almost 1% on the market open. Although this bank stock issues a dividend of 6% to investors at the current price of $44, the bank also comes with more risk.

The bank’s adjusted return on shareholder equity is 8.5% — a below-average return on equity compared to peer banks like Canadian Western and Toronto-Dominion.

Meanwhile, although Laurentian maintains a stronger capital position than required by Basel III, the bank’s Common Equity Tier 1 ratio is also below many peers at 9%.

Toronto-Dominion Bank

Toronto-Dominion Bank rose by a modest half a percent on market open after missing earnings. The initial rally didn’t last, as the stock’s price normalized before lunch on Thursday.

TD’s Common Equity Tier 1 Capital ratio came in higher than both Canadian Western and Laurentian Bank of Canada at 12%. Not only is Toronto-Dominion one of the safest banks, but its dividend provides investors with an annual yield of over 4% at the stock’s current price of $71.58.

Foolish takeaway

Toronto-Dominion Bank remains one of the best banks to add to a TFSA. Shareholder confidence is secure, as demonstrated by the weak reaction to Thursday’s earnings miss. The fact that the bank’s stock price did not fall is a testament to the trust and confidence of its shareholders.

For the most part, TFSA investors should also not worry about Laurentian Bank as it offers shareholders a healthy dividend yield of 6%. The competitive return makes up for the added risk in the bank’s riskier capital position. TFSA investors with a large appetite for dividends and aggressive savings goals should take a look at Laurentian Bank.

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 Debra Ray has no position in any of the stocks mentioned.

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