Dividend stocks are coming back into fashion.
After years of big tech ruling the roost, dividend payers are now beginning to look good. Last week, the NASDAQ fell 2.77%, while the Dow Jones Industrial Average fell 0.98%. The Dow, which contains more dividend stocks, beat tech stocks by a country mile. While value stocks have fallen just like tech stocks have, they have done comparatively well.
Further, this situation could persist well into 2022. Tech stocks soared to record highs this year but are now being challenged by higher interest rates. Meanwhile, there are certain dividend stocks that actually thrive in high-rate environments — namely, banks. In this article, I will share my favourite dividend stock for 2022 and beyond. As you probably guessed, it’s a bank.
Dividend stocks: Few can beat TD Bank
Toronto-Dominion Bank (TSX: TD)(NYSE: TD) stock is a true Dividend King. It has a 3.8% yield. Its payout ratio is just 39%. It has paid a dividend every year for the last 20 years at least. Basically, the stock has all of the characteristics that dividend investors look for. Yet it trades at just 11.7 times earnings.
This stock certainly looks like a bargain. And, well, it is. TD Bank has grown its earnings by about 11% annualized over the last five years. If the COVID-19 pandemic hadn’t taken earnings lower in 2020, the growth rate would likely have been much higher than that. So, you’ve got a stock here with a high yield, a cheap valuation, and moderately good earnings growth. On top of that, the company just hiked its dividend by 13%.
Interest rates rising
It’s one thing to note that TD Bank has enjoyed historically strong performance, but quite another to say that it will continue going forward. To make that prediction, we’d need to know that TD had a chance of performing just as well in the future as in the past. And we have at least one indicator that it will: rising interest rates.
It has long been rumoured that interest rates would rise in the U.S. and Canada in 2022. The Bank of Canada pretty much confirmed that it would hike rates. The Federal Reserve recently confirmed it as well. In fact, the Fed has three rate hikes planned for next year. With higher interest rates can come higher profit margins on loans. Rate hikes tend to increase the spread between deposit interest and loan interest.
This may push bank earnings higher. And both of TD’s main markets will be raising rates next year. That’s a good sign, particularly when you consider that higher interest rates hurt tech stocks and many other types of stocks.
Economy recovering
Another bullish sign for TD Bank is the economic recovery from COVID-19. Last year, the COVID-19 pandemic caused the economy to dip into a recession. This year, it’s crawling its way out. An economic recovery means more need for money, which means more loans — a positive for a bank like TD. Also, the healthier the economy is, the less TD’s PCLs will be. That’s a positive, because increases in PCLs take a bite out of net income.
