Better TFSA Buy: Royal Bank Stock or TD Bank Stock?

Royal Bank and TD are Canada’s biggest banks. Is one of these stocks oversold today?

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Royal Bank (TSX:RY) and TD Bank (TSX:TD) are Canada’s largest banks. The pullback in TSX bank stocks in recent weeks is giving Tax-Free Savings Account (TFSA) investors a chance to buy the stocks on a nice dip to secure higher dividend yields and a shot at decent gains when the market rebounds.

Royal Bank

Royal Bank sits at the top of the list among Big Five Canadian banks based on its current market capitalization of close to $178 billion. It is also ranked among the top 10 in the world based on this metric.

The stock trades near $129 per share at the time of writing compared to $137 last month, but it is still comfortably above the $118 it touched in October last year.

Royal Bank spent big bucks on acquisitions in the U.K. and Canada in 2022. The company bought a wealth management business, Brewin Dolphin, in the United Kingdom for $2.4 billion and is working to close its $13.5 billion takeover of HSBC Canada.

Royal Bank’s last major acquisition was its US$5 billion purchase of City National in the United States in 2015. The bank avoided the 2021/2022 buying spree in the U.S. that is now causing some troubles for its peers.

Investors who purchase Royal Bank stock at the current level can get a 4% dividend yield. The shares currently trade for 12.4 times trailing 12-month earnings.

TD Bank

TD trades for close to $81 per share at the time of writing compared to $93 in February. The 12-month closing low is around $77 — a level it approached last month amid the widespread plunge in bank stocks.

TD announced two significant acquisitions in the United States last year. The company recently completed its US$1.3 billion purchase of Cowen, an investment bank. The larger US$13.4 billion takeover of First Horizon, however, is still ongoing. The selloff in the share prices of U.S. regional banks has investors wondering if TD is overpaying for First Horizon, a bank with operations located in the southeastern part of the United States. First Horizon’s stock fell as much as 40% below TD’s agreed takeover price during the rout last month.

First Horizon would add more than 400 branches to TD’s existing American operations that currently run from Maine to Florida. Upon completion, TD would become a top-six bank in the American market, so there are long-term strategic reasons for TD to try to get the acquisition completed.

If the deal doesn’t close, TD would have a significant pile of excess cash to spend on another acquisition or it could the return funds to shareholders through stock buybacks and higher distributions.

TD trades near 9.8 times trailing 12-month earnings and offers a 4.75% dividend yield.

Is one a better TFSA buy today?

Royal Bank and TD are top TSX stocks that pay attractive dividends that should continue to grow. Investors should anticipate ongoing volatility in the bank sector over the coming months, as the market tries to figure out if the recent bank failures in the United States and Europe are isolated incidents or the beginning of a broader global financial crisis. Given the uncertainty in the market, I wouldn’t back up the truck today to buy bank stocks.

Royal Bank is likely the safer bet of the two right now, but it isn’t cheap. TD might be interesting for contrarian TFSA investors who are searching for a deal and are willing to ride out some turbulence. The stock looks undervalued at less than 10 times earnings, and with TD’s current dividend yield near 5%, you get paid well to wait for the recovery.

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.

The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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