In the past, I made profits from big Canadian bank stocks, selling when they were higher after buying them at lower levels. Looking back, it’s kind of silly. Trading in and out of stocks is extra work. Plus, you can’t time the trades perfectly. More importantly, the big Canadian bank stocks pay nice, growing dividends. In other words, a good portion of total returns come from their dividends. You’ve got to hold them to earn the dividend income.
TD Bank stock: I plan to buy more
Last month, I picked up shares of Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock. This time, I’ll probably hold. Basically, I can hold the quality shares and do nothing and earn a growing, passive income. In fact, I plan to add to the position if shares remain discounted when I have extra cash.
Over the years, I’ve taken some post-secondary courses in accounting and financial markets and have gained a better understanding of financial statements like income statements, balance sheets, and the statements of cash flows. I also learned about the history of the big Canadian banks and how they transformed into financial conglomerates. The takeaway is that the big banks make tonnes of money.
For example, in the trailing 12 months (TTM), TD Bank made profits of more than $14 billion and paid out less than 30% as dividends. Additionally, it has $67 billion of retained earnings on its balance sheet, about $17.5 billion, or 35% higher than in 2019.
The bank will have no problem increasing its dividend over time. That said, since it is federally regulated, when economic times are bad, such as around the times of the COVID-19 pandemic and the credit crisis of 2007, TD stock and other publicly traded financial institutions may be restricted from stock buybacks and dividend increases.
Right now, Investors can buy TD stock at a discount of roughly 11% and lock in an initial dividend yield of close to 4.3%.
Aecon is unlike TD stock, but I will buy more if it falls lower
As a cyclical stock, Aecon (TSX:ARE) is a riskier investment than TD. Other than its earnings going up and down like a roller coaster, investors will also need to be able to withstand greater volatility in holding the stock and bear the possibility of a dividend cut.
The 6.9%, big-dividend stock doesn’t have to cut its dividend. At the end of Q2, it had $404.9 million in retained earnings on its balance sheet, which management could use as a buffer for its dividend. Its TTM dividend payment was about $43 million. Based on its dividend payment in the last quarter, the company’s retained earnings can cover close to nine years of dividends.
In the first half of the year (H1), the company reported a loss of $23.8 million. This is small versus its retained earnings coffer. There’s demand for the company’s products and services because H1 revenue growth was 22.3%, and it has a backlog of $6.6 billion — 1.2% higher than a year ago.
If management can keep better control of costs or improve its margins over the next two to three years, the stock could rebound considerably to, say, $21. Including its dividend payments, an investment today would more than double investors’ money.