Better Dividend Buy: TD Bank Stock or RBC Stock?

These two bank stocks make up the largest of Canadian banks, but when it comes to the dividend, which is the better — and safer — buy?

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When it comes to bringing in passive income through dividends, Canadian banks are a strong option — especially Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY), which hold the top two spots as the country’s largest banks.

But if you want stable dividends, which is the better option? Let’s look at the upside and downside of TD bank stock and RBC stock to decide.

TD Bank stock

TD Bank stock recently saw a surge in share price, as the bank’s planned acquisition of First Horizons Bank fell through. The market cheered the decision, as this put a lot more cash in the pockets of TD Bank stock — cash it’s likely to need.

While TD bank stock may have provisions for loan losses, as the other Canadian banks do, it also has a huge amount of exposure to the United States. It’s still one of the top 10 banks in the U.S. and was hoping to expand that through the purchase of First Horizon’s locations in the western U.S.

So, now, it definitely has the cash available to continue increasing its dividends. That being said, the company could have purchased these banks for pennies on the dollar. Now, if TD Bank stock wants to expand in the future, it’s likely to do so for a less-than-stellar deal. And that could mean lower dividend increases in the years to come.

Shares of TD Bank stock are down 10% in the last year, while it holds a 4.61% dividend yield.

RBC stock

As for RBC stock, it remains a steady option, with the bank not making any major moves to show concern, or excitement for that matter. But in the market, that’s what we tend to want. If you want excitement, go to Vegas. If you want stability, consider a Canadian bank.

And of those banks, RBC stock might be the most stable. It’s managed to take a huge share of the wealth and commercial management market. What’s more, it continues to have lucrative private clients as well.

That being said, there is a bit of excitement coming the way of investors in the near(ish) future. HSBC Holdings is set to be sold to RBC stock but could simply take longer than expected. The $13.5 billion transaction should happen in early 2024. This comes as other acquisitions (such as TD Bank stock’s acquisitions) continue to fall through.

While investors may have to wait a bit longer, it could be well worth it. A smooth transition will mean less chance of a cut in dividends to fund the purchase. Meanwhile, shares remain up 2.6% in the last year for RBC stock, with a yield at 4.03%.

Bottom line

While TD Bank stock may have the higher dividend yield, RBC stock seems to have more protection. It also has more growth on the way in early 2024 — something that TD Bank stock simply doesn’t at this point. When that revenue comes in, RBC stock may be able to make a larger increase to its dividend in that time.

So, if you’re looking for safety from your dividend purchase, you really can’t go wrong with either bank stock. Right now, however, during this downturn, I would pick RBC stock over TD Bank stock.

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 Amy Legate-Wolfe has positions in Royal Bank Of Canada and 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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