Canadian Bank Stocks Won’t Stay This Cheap Forever

TD Bank (TSX:TD) stock is one great value play for long-term investors thinking about big dividends.

| More on:
Bank sign on traditional europe building facade

Image source: Getty Images

Canadian bank stocks have been out of favour for an absurd amount of time now. From the subtly weakening macro picture to fears of a coming Canadian recession, the banks seem to be flying in no man’s land. Despite the numerous headwinds, lack of catalysts, and the unforeseen barrage of U.S. regional banking runs and failures back in spring, I still stand by Canada’s Big Six Canadian banks.

Though I have no idea (nor does anyone else) know what the path for the big bank stocks will be over the next six months or the full year, I do know that the dividend payments are bountiful. And the price of admission is quite reasonable relative to most other stocks driving up this market.

Undoubtedly, slightly swollen dividend yields in the bank stocks accompany slightly higher risks. We are headed for a recession, after all. In addition, bank yields may not be nearly as enticing in today’s high-rate world. Back when rates were at or around the floor, a 3-5% yield would have been incredibly attractive.

Nowadays, you can score a 5% rate on a risk-free asset, like a GIC (Guaranteed Investment Certificate) at your local bank. And you can sleep easy knowing that the invested principal isn’t going anywhere, even if the coming recession is far more hideous than pundits expect.

Banking on the big bank dividends!

For now, the risks with banks, I believe, are worth bearing. Though GICs and risk-free rates are far more competitive, I’d argue that rates will not stay at these heights for long. Though a few more rate hikes from the Bank of Canada are definitely possible in the second half of this year, rates are expected to peak and decline in a few years down the road. Maybe rates will fall in mid- to late 2024 or perhaps 2025.

Regardless, inflation is backing down. And with that could come the beginning of the end of the central bank’s tightening cycle. Indeed, I like to view interest rates like gravity. What goes up must (eventually) come down. Of course, it could take many years (or even decades) for rates to return to pre-pandemic levels. Regardless, when rates do begin to drop, GIC rates could fall, and the swollen yields on battered dividend stocks will become more competitive again.

The big bank dividend yields are yours to “lock in.” When shares appreciate, yields could fall again, even with the annual dividend hike considered. Undoubtedly, the power of the bank dividends is more notable when you’ve got a very long time horizon (say, 10 years).

TD Bank: Still a great bank stock

TD Bank (TSX:TD) is just one Canadian bank that I think is worth pursuing while it’s stuck in a bear market. Today, shares sport a 4.8% dividend yield, which is quite attractive, even when considering you can score a one-year GIC with a similar rate.

The stock itself looks dirt cheap at just north of 10 times trailing price to earnings. Though TD faces unique headwinds to its peer group, most notably its large U.S. exposure, and the recent direct deposit outage suffered last Friday, I’d argue that the risk/reward scenario is tough to top from a longer-term perspective.

These days, U.S. retail banking is out of favour. In a few years, it could be viewed as attractive again, especially if TD Bank goes on the hunt for an acquisition again. In any case, TD is rich with cash and value. It just needs to sail through a high-rate storm that could see loan growth stall for some period of time.

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.

More on Bank Stocks

calculate and analyze stock
Bank Stocks

Canadian Blue-Chip Stocks: The Best of the Best for December 2023

Here are two of the best Canadian blue-chip stocks you can buy in December 2023.

Read more »

tsx today
Bank Stocks

TSX Today: What to Watch for in Stocks on Friday, December 1

The main TSX index rallied 7.2% last month, posting its best monthly performance since November 2020.

Read more »

growing plant shoots on stacked coins
Bank Stocks

Bank of Nova Scotia: Emerging Markets and Dividend Growth Combined

Scotiabank (TSX:BNS) stock is a strong option for those seeking returns and dividends, but when will they start to see…

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Bank Stocks

New Year, New Money: CPP Benefits Increase in 2024

If you don't benefit from CPP enhancement, you may benefit from dividend stocks like the Toronto-Dominion Bank (TSX:TD).

Read more »

woman data analyze
Bank Stocks

1 Top Financial Stock to Buy on the TSX Today

Here’s a reliable, dividend-paying financial growth stock that can help you get steady returns on investments in the long run.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Bank Stocks

Bank of Nova Scotia Stock: Buy, Sell, or Hold?

Bank of Nova Scotia just reported fiscal 2023 results. Is the stock's dip a buy or is more downside on…

Read more »

bulb idea thinking
Stocks for Beginners

The Smartest Dividend Stocks to Buy With $400 Right Now

If you're looking for big gains from a small investment, the bank stocks are your best bet -- especially with…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

TD Bank Stock: Buy, Sell, or Hold?

TD Bank has been hit with negative earnings momentum and rising provision for credit losses, making TD Bank stock a…

Read more »