1 TSX Stock That Outperformed Royal Bank of Canada (TSX:RY) and Toronto-Dominion (TSX:TD) in the Last Decade

Forget Royal Bank of Canada (TSX:RY) and Toronto-Dominion Bank (TSX:TO) stocks and look at this 5.7% yielding mortgage lender for outsized gains.

| More on:
Bank sign on traditional europe building facade

Image source: Getty Images

Canadian banks such as Royal Bank of Canada and Toronto-Dominion Bank are well known among investors. The two banking giants have created massive wealth over the last few decades via capital appreciation and dividends. However, there is another financial stock on the TSX that is much smaller compared to Canada’s largest banks but has generated outsized returns ever since going public back in 2011.

Shares of mortgage lender First National Financial (TSX:FN) have returned 84% since its IPO. Comparatively, the RY and TD stocks have returned 76.6% and 59.6%, respectively, in this period.

Further, First National Financial stock has a forward dividend yield of 5.7%. The dividend yield for RY stock and TD stock stands at 4.7% and 5.3% respectively. So why has First National Financial outperformed Canada’s banking heavyweights? Moreover, let’s take a look at whether the stock remains a good pick for long-term investors right now.

First National Financial is a residential lender

First National is Canada’s largest non-bank lender and is valued at a market cap of $2.1 billion. It is a leading non-bank mortgage originator and underwriter with a huge domestic presence. The company generates revenue by the value of its Mortgages Under Administration (MUA) that surpassed $100 billion in 2019.

In the last year, the company served over 300,000 borrowers with $111.4 billion in MUA, a record high and 5% up compared to 2018. In 2019, FN sales grew 12% to $1.3 billion driven by growth in MUA and mortgage origination. Its net income also reached a record of $177.2 million, while it paid $144.4 million in dividends.

In the second quarter of 2020, the company’s MUA increased 5% to $114.9 billion, up from $109.6 billion at the end of June 2019. Revenue also increased 3% to $344.6 million, up from $335.2 million in the prior-year period while net income soared by an impressive 16.7% to $0.84.

Despite an uncertain macro environment, First National’s new mortgage originations in Q2 were up 2% at $6.6 billion in Q2 while total mortgage renewals increased 19% to $2.5 billion.

The company’s Executive Vice President Moray Tawse said, “Q2 was a very productive period with results that exceeded our expectations. Within single family, the team drove mortgage originations higher by 15% year over year, which we attribute to a number of factors which fueled growth in First National’s market share of the mortgage broker channel.”

He added, “On the commercial side, we increased CMHC insured multi-unit origination by 32% to offset a substantial decline in demand for uninsured product. While total commercial originations of $2.1 billion were 17% below last year, we consider this a strong performance under very difficult circumstances.”

What’s next for First National investors?

Despite the huge market presence of Canada’s Big Five banks, FN manages to furnish a decent number in mortgage originations every year.

FN stock is trading at $34.5, which is 23% below its 52-week high. Shares of the financial aristocrat have gained 84.5% since touching multi-year lows in March 2020.

Its payout ratio of 77% makes a dividend cut unlikely, which suggests FN is a top Canadian stock to hold not just for capital gains, but for dividend income as well.

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 Aditya Raghunath has no position in any of the stocks mentioned.

More on Dividend Stocks

Canadian Dollars
Dividend Stocks

Buy 734 Shares of This Top Dividend Stock for $9,574 a Year in Passive Income

Are you looking to earn regular income? Now is an opportune time to buy Dividend Aristocrats at discounts and accelerate…

Read more »

A plant grows from coins.
Dividend Stocks

This Ultra-High Yield Stock Just Hit a 52-Week Low, and it’s Still a Buy Today

Enbridge Inc (TSX:ENB) stock recently hit a 52-week low. Here's why.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Are you looking to earn cash every month from October 15 onwards? This 6% dividend stock gives you monthly payouts.

Read more »

Person slides down a stair handrail
Dividend Stocks

With a 7.6% Dividend, This TSX Stock Is One to Buy Now and Hold for Decades

Now is an opportune time to invest in this no-brainer TSX stock and get +$30 extra dividend for decades on…

Read more »

Portrait of woman having fun in the street.
Dividend Stocks

CPP Benefits Will Be Higher for Millennials and Gen Z

Older Canadians won't get enhanced CPP, but they may invest in dividend stocks like Royal Bank of Canada (TSX:RY).

Read more »

A plant grows from coins.
Dividend Stocks

The Best Dividend Stocks in Canada Right Now

Seeking to give a boost to your income portfolio, consider investing in these best Canadian dividend stocks.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Retirees: Want Fast-Growing Passive Income? Here Are 3 Long-Term Dividend Stocks

Are you looking for dividend stocks that can grow their distributions very quickly? Here are three long-term picks!

Read more »

dividends grow over time
Dividend Stocks

2 Top Dividend Stocks You Can Buy and Hold Forever

The market is full of great dividend stocks, but not all are long-term gems. Here are two options that you…

Read more »