1 Blue-Chip, 5%-Yield Stock That’s a Screaming Buy for April

TD Bank (TSX:TD) stock is getting too cheap to ignore at these depths, even with the fate of First Horizons up in the air.

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While bonds and other risk-free assets may be the most rewarding in years, I still think younger investors, like millennials, would be better served by having a greater chunk of one’s wealth in equities with valuations hovering at the lower end of the historical range.

A 4% yield without having to sacrifice any capital seems like a great deal on paper. However, when you consider inflation remains above 5%, you’ll still lose ground, as lingering inflation sticks around for that much longer.

Though you could go with a longer-duration bond that will prosper, as rates fall and deflationary forces take hold (think U.S. banking failures), I think it’s a wiser decision to stay diversified across stocks and bonds.

Taking risks with best-in-breed blue chips

By taking risks with stocks, you’ll stand to gain so much more than 4% — especially if you have what it takes to spot the numerous opportunities to pay three quarters to get a full dollar. And if you’ve got a time horizon beyond 10 years, the risks involved with stocks become less considerable.

Indeed, stocks tend to be less risky with long time horizons. What is considerable are the potential gains to be had with the stocks of well-run companies picked up at modest prices.

In this piece, we’ll look at one blue chip with a nearly 5% yield and a price-to-earnings multiple below 10 times.

TD Bank: Banking on a bargain

TD Bank (TSX:TD) has been a relative laggard in the Big Six in recent weeks, as the U.S. banking turmoil worked its way into the Canadian bank’s share price.

Undoubtedly, TD’s sizeable American business is a reason why shares have sold off so viciously. Like the numerous U.S. banks under pressure, TD stands to take a hit from unrealized losses on longer-duration fixed-income investments. Still, TD is worlds stronger than the likes of the less-diversified and capitalized regional U.S. banks.

Simply put, I think it’s completely absurd to think TD (or any Big Six bank) could wind up like Silicon Valley Bank. TD has more than enough to cover itself on a stormy day. As a Canadian bank, TD still boasts an impressive tier-one capital ratio. That’s pretty much standard for Canada’s big banking behemoths!

Even if TD was forced to realize painful losses on its portfolio, TD would still not be in any sort of crisis. Undoubtedly, the Canadian banks are best-in-breed banks when it comes to preparing for those stormy days. Even with TD’s growing exposure to the U.S. regional banking scene, the bank is unlikely to flinch as a result of the tension growing south of the border.

Can TD get a better deal for First Horizons?

TD may have an opportunity to get a better price for Tennessee-based First Horizons Bank amid recent U.S. bank volatility. Prices on the U.S. regional banks have gone down drastically in recent weeks! Moving ahead, I think TD can and should push to get a better deal for First Horizons, even if it means running the risk of walking away.

In many prior pieces, I cited the plunge in American regionals as a good (not bad) event for TD, at least from a buyer’s viewpoint.

Even if First Horizons don’t budge on the price, TD can explore other options. There are a lot of pressured U.S. regionals out there that are trading at sizeable discounts. Some may be more eager for a buyer. Indeed, sometimes it’s good to take your sweet time with proposed deals!

At the end of the day, TD now has a lot of leverage. And the market doesn’t seem so confident that the original deal will go through at the initial price, given the plunge in First Horizons shares.

A $13.4 billion takeover doesn’t make a lot of sense at this juncture, in my opinion, given First Horizons’s market cap has sunk below $10 billion. In light of the new risks, I’d not be surprised if a new deal is negotiated for $12 billion or less. If a lower price can be struck, look for TD stock to rally with fury!

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 Joey Frenette has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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