Are you looking to build tax-free passive income in your TFSA?
If so, then bank stocks are where you want to be.
Offering decently high yields and strong dividend growth, Canadian banks are some of the best income investments out there right now. While their yields aren’t quite as high as those you’ll find in the energy sector, they are backed by much less volatile earnings. For this reason, you can expect a more steady, uninterrupted dividend-growth streak from banks than you can from energy stocks. In this article, I will explore three bank stocks that could provide TFSA income — two Canadian and one American.
Royal Bank of Canada (TSX:RY)(NYSE:RY) is Canada’s biggest bank. Founded in 1869, it hasn’t missed a single dividend payment since that year. That’s a dividend track record you don’t see very often. While RY hasn’t necessarily raised its dividend every year over the last 150 years, it has always at least paid it. That speaks to a very reliable financial institution that could keep growing going forward.
In its most recent fiscal year, RY delivered the following:
- $16 billion in net income, up 40% year over year
- $11 in diluted EPS but 41% year over year
- $753 million in PCLs (PCL-to-loan ratio declined 78 basis points)
- A 13.7% CET1 ratio, way above regulatory requirements
Pretty much all of these results were solid. Yet RY stock is still very cheap, trading at only about 12 times earnings. In 2022, rate hikes will be coming, which could improve the big banks’ profitability. Put all of this together, and you’ve got a very good picture for RY in the near term.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is another Canadian bank stock. Like RY it may take advantage of interest rate hikes coming in the year ahead. Also like RY, it posted very good earnings for 2021. On top of that, there’s another reason to like TD: U.S. exposure.
TD is currently the ninth-largest retail bank in the United States. This is sizeable enough to contribute significant sums to net income (usually about 33%), but small enough that there is still significant growth potential. TD is mostly concentrated on the East Coast of the U.S., it has barely begun to penetrate markets like Nevada and California. If it does, and does so successfully, then it could see significant growth in the years ahead.
Last but not least, we have Wells Fargo (NYSE:WFC). This is a U.S. bank that is widely owned by value investors like Charlie Munger. Like most big banks, it is in a good place right now, with high returns on assets, decent earnings growth, and the prospect of making money off rate hikes. As for why I’d mention this U.S. bank specifically over any of the others, it has an enviable position in the fintech industry.
Fintech refers to innovative financial technologies, like payments and smartphone stock trading. The industry itself is risky, but Wells Fargo has pretty risk-free exposure to it. As PayPal’s custodial bank, it makes money off PayPal transactions and bank deposits. These fintech payment companies are in a growth spurt, and Wells Fargo is making money off one of the biggest ones. So, it’s a good bank stock to hold if you’re looking to bet on the growth of fintech without the volatility.