When it comes to stock investing, it’s a good idea to look at their longer-term results or expectations instead of being caught in the moment. For now, the big Canadian bank stocks are experiencing headwinds, and their stocks have performed weakly.
Capital markets results can be volatile. When the market and investors are generally bullish, this business segment will do well and vice versa. Housing markets are anticipated to slow because of higher interest rates. Some economists believe there’s a higher probability of a recession in Canada and the United States by 2024. So, it’s natural that some portfolio managers and investors are underweight in the banking sector.
Sure enough, BMO Equal Weight Banks Index ETF, as a benchmark for the banking sector, has declined meaningfully by about 17% since the start of 2022 when interest rates started rising. Leading North American bank Toronto-Dominion Bank (TSX:TD) has been a tad more resilient, with a decline of roughly 15%.
TD and ZEB Total Return Level data by YCharts
While it’s easy to get caught up in the negativity, I thought it would be interesting to point out that TD stock is up close to 33% in the last three years versus the exchange-traded fund (ETF) benchmark’s ascent of close to 29%. TD’s price action equates to price gains of almost 9.9% per year in this period, which is not bad. When you account for the dividends as well, the total annualized returns end up being about 15%, which is very good for a blue-chip stock.
TD Bank is scheduled to report its earnings results this Thursday. In the current macro environment, the general market is expecting higher loan losses and depressed earnings. So, investors should be ready for a rocky ride in the short term.
In the near term, say, over the next 12-18 months, the stock could continue to be depressed because of some of the issues discussed. It’s important to remember that it’s during the tougher times that investors are able to buy shares of wonderful businesses like Toronto-Dominion Bank at a discount to what it’s really worth.
Particularly, investors can enjoy a safe stream of dividend income from the quality stock. Its earnings have covered its dividends through economic cycles. TD stock has paid dividends since 1857. And it has increased its dividend every year since fiscal 2011. It only froze its dividend in fiscal 2010, around the time of the global financial crisis.
The bank has a higher probability of freezing its dividend during highly uncertain economic times. Around recessionary times, the regulator, the Office of the Superintendent of Financial Institutions, would advise the banks to stop doing stock buybacks and dividend increases to raise their reserves and protect the stability of the Canadian financial system. At times like these, investors who have confidence in the big banks should consider investing long-term capital in the relatively cheap names for bigger dividend yields and higher long-term returns potential.
In a normal market, it would be a treat to be able to buy TD stock for a dividend yield of about 4%. At $82.56 per share at writing, the stock offers a nice dividend yield of close to 4.7%. Given TD’s track record, it’s likely to outperform the ZEB ETF benchmark over the next 10 years.
