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Why Canadian Banks Could Soar in April 2021

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Canadian bank stocks have a ton of momentum right now. It appears that this momentum certainly could continue into April.

Accordingly, for investors who want to play this sector, I believe that it’s hard to find a better option than Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock. Indeed, it has been one of my top picks for a long time.

Here’s more on why I think this stock could outperform the market this coming month.

Federal Reserve moves could boost Canadian banks

As a result of the pandemic, regulators enacted some pretty drastic measures to shore up the financial sector. Among these, Federal Reserve restrictions on U.S. banks pertaining to share buybacks and dividend increases initially led to quite the selloff in the banking sector. After all, one of the key reasons investors buy banks is for their income appreciation over time.

The main goal of imposing these restrictions? Regulators wanted to enforce the conservation of capital, keeping banks in a position to lend even when the economy took a hit. Indeed, these changes helped the banks sustain operations throughout the period of crisis.

However, the Federal Reserve recently announced that these restrictions would be lifted, and the supplementary leverage ratio rule will expire at the end of this month.

These restrictions seemed to have worked in providing a buffer against losses. Accordingly, the move by the Fed to remove these restrictions can be viewed very positively. With a positive backdrop of a more “normal” regulatory environment on the horizon, investors in banks may be more enticed to pick up shares. This is a sector that has done very well since March lows, and indications are that this momentum could continue.

Among the Canadian banks, I think TD is one of the best picks in this regard. This is because the bank is geographically diversified, and actually has more retail operations in the U.S. than anywhere else. As the regulatory environment shifts in Canada, this bank should benefit over the medium term.

High-quality dividend yield

A declining stock price a year ago led investors who were bullish on the Canadian banking sector to pick up high single-digit yields in companies like TD. That said, the company’s current dividend yield of 3.8% isn’t too shabby. That goes double for investors considering fixed income today.

TD has got one of the best asset portfolios of its peers and has been gaining efficiencies of late. The company’s move to close 82 branches in the U.S. signifies TD’s commitment to operational efficiency. The company has also been one of the leaders in using technology to boost returns among its peers.

Thus, I believe TD is a Canadian bank with one of the highest-quality dividend yields out there for investors today. It’s a bank every long-term investor should consider today.

Like the banking sector? These companies might even outperform TD!

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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 Chris MacDonald has no position in any of the stocks mentioned.

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