Canadian banks have been absolute dogs for the last few months. It seems like every time you get a break and they start to move up, the stocks head right back down the next day. Sure, they are still off their lows, which is kind of nice if you’re the type of investor who likes to see stocks move a little.
They are starting to move up quickly, however. Are Canadian banks still good buys, or is it too late to step in?
Even worse, these stocks still face a number of headwinds. The housing market is still in the hands of a very indebted Canadian population. Corporate debt is equally high, making the possibility of bankruptcies ever more dire. And then there’s the oil sector — the most hated industry in the entire nation.
On top of these issues, Canada is facing what may be a deep and sustained recession. Our government has been very generous with its financial aid packages, driving our country even further into debt than it was in the free-spending good times. The banks certainly have their work cut out for them.
Q2 2020 results
First and foremost, the large Canadian banks have done a good job navigating tough times in the past. They have a long history of working through recessions, depressions, wars, and trade disputes. These institutions are about as solid as a bank can get.
One of my favourite banks in the space, Toronto-Dominion Bank (TSX:TD)(NYSE:TD), is set to get through this in good shape. While I’m not saying the bank is going to coast through these tough times, it is set to push through in decent shape.
Earnings were hammered in the recent report, decreasing by about 50% year over year. Provisions for loan losses increased by $3.2 billion in the second quarter. Profits in its U.S. operations decreased by 73% as customer activity collapsed.
The dividend was increased earlier this year just before the stock market crash in March. The good news is that this increase is already in the stock, so investors will not be questioning an increase later this year.
The growing dividend payout rose by 7% over the previous year, leaving the bank with a yield of about 5% at the current share price.
Canadian bank dividends, despite the recent 40% dividend cut by Laurentian Bank, are historically quite secure. TD Bank will aspire to maintain its dividend through this difficult period.
The fact that the dividend yield is still low compared to other banks is an indication of the confidence investors have in the quality of its payout.
The Foolish takeaway
At the time of this writing, TD’s dividend was yielding slightly less than 5% for the first time in months. The window to enter a position and lock in a 5% yield may well be closing. This stock should be a core holding in any Canadian income investor’s portfolio.
The dividend is as safe as any bank can be, and there will likely be continued growth in the future. Although the economic outlook is grim, this is a stock still worth buying that you can bank on.