Better Buy: Toronto-Dominion Bank or Royal Bank of Canada Stock?

TD (TSX:TD) and Royal Bank stock (TSX:RY) are both strong Canadian banks, but which one comes out on top long term?

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Investing in bank stocks is a popular choice for many investors seeking a combination of stability and dividend income. Two of the largest Canadian banks, Royal Bank of Canada (TSX:RY) and Toronto-Dominion Bank (TSX:TD), are often top contenders for those looking to invest in the financial sector. In this article, we’ll analyze key factors to help you determine which of these two banking giants is the better stock to buy.

Royal Bank stock

Royal Bank stock, with a price-to-earnings ratio of 11.3, offers an attractive valuation. Furthermore, its 4.71% dividend yield is particularly appealing to income-focused investors. However, its shares have faced a 6.5% decline in the last year. But don’t let that keep you from the stock.

Royal Bank’s strengths lie in its well-established Canadian banking operations, which continue to deliver robust returns. With a significant presence in global capital markets and a strong wealth-management segment, it’s a diversified player in the financial industry.

Royal Bank’s worldwide scope in capital markets and wealth management provides a diversified stream of revenue, which may lead to outsized fee income compared to its peers. The Canadian banking business remains a stronghold for Royal Bank, with returns on equity exceeding 30%. Finally, expansion into the U.S. high-net-worth and commercial banking space is expected to bring additional high-margin growth.

Even so, the stock has significant exposure to the Canadian housing market, which could pose risks if the market faces challenges. The bank may face difficulties in achieving loan and revenue growth due to potential constraints on Canadian consumers’ borrowing capacity. The recent acquisition of HSBC Canada carries potential risks that might not add significant value for shareholders.

TD stock

TD stock, with a price-to-earnings ratio of 10.6 and a 4.73% dividend yield, presents another attractive option for investors. Like Royal Bank stock, TD stock has also faced a share price decline, of 6.3%, over the last year. TD’s Canadian retail operations are a standout feature, with market dominance and a strong presence in various product categories. In the United States, TD has the most branches among Canadian banks and a 12% ownership stake in Charles Schwab. This makes it a considerable player in the U.S. market.

TD’s positioning as a major discount brokerage player is notable. This industry’s growth potential may provide further opportunities for the bank. The profitability of TD’s Canadian bank segment is expected to continue, providing a solid foundation for strong returns. The bank’s position as a top issuer of cards in Canada could contribute to more profitable business opportunities. The acquisition of Cowen should enhance TD’s U.S. capital markets operations, driving revenue and net income growth.

Still, TD’s higher exposure to the U.S. and greater sensitivity to interest rates may pose challenges, particularly in an environment of rising rates. The Canadian housing market’s resurgence could increase risks for the economy and banking sector. This includes TD, and could lead to credit losses and earnings pressure. TD stock may need to explore opportunities outside Canada for growth, which could impact overall returns.

Bottom line

Both Royal Bank stock and TD stock are formidable players in the Canadian banking industry. But each has its unique strengths and challenges. Royal Bank boasts a robust global presence and strong focus on wealth management. Meanwhile, TD’s dominance in Canadian retail banking and growing presence in the U.S. make it a compelling choice.

Ultimately, both are excellent choices with long-term growth ahead. If you’re looking for international exposure, Royal Bank stock may be a great choice for stable income. If you want more growth, then TD stock may be better. But it’s always up to your goals and investment strategy.

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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