It’s a great time to be a passive-income investor, with high rates on risk-free assets and historically elevated yields of a broad range of dividend- and distribution-paying securities. Undoubtedly, high rates have hurt the share prices of various yield-heavy investments.
As share prices have fallen, yields have climbed. And though there have been some instances of dividend (or distribution) cuts over the past two years, I think that not all high yielders are destined to cut their payouts drastically, even if Canada is bound for a recession at some point next year.
Indeed, investors should pay careful attention to a company’s cash flows and how they stand to be pressured, as the economy feels the weight of higher interest rates. Also, looking at a firm’s dividend history can help you paint a better picture of a company’s dividend health.
Canadian bank dividends are beyond healthy
When it comes to the Big Six Canadian bank stocks, their payouts are on profoundly steady footing. Though they’re elevated, I simply do not see any reductions, even if next year’s downturn proves harsher than expected. Indeed, Canada’s big banks have impressive capital ratios to weather absolute economic hailstorms.
Arguably, some of the banks — like TD Bank (TSX:TD) after it walked away from a regional bank acquisition earlier this year — are over-capitalized and ready to ride out even hurricane-like conditions for the economy. Of course, many pundits don’t expect a bear-case scenario to pan out. In fact, the banks may already be oversold and undervalued, depending on who you ask.
In this piece, we’ll look at two banks that may be worth careful consideration going into year-end.
TD Bank stock is a natural pick, thanks to its impressive capital ratio and ability to make a sizeable deal (likely in the U.S.) at some point over the next few years. For now, TD seems content with playing the long game and doing its best to weather a rough patch for the Canadian economy.
As rates continue to stay elevated, TD also stands to benefit from better net interest margins (NIMs) on deposits. If rates don’t hurt the economy too much, TD may very well be able to pick up traction before the economy is out of the woods. The stock’s still cheap, and the yield is still bountiful at 4.58%.
Going into 2024, TD is one of the top stocks to bank on if you seek value and passive income. And if the banks are on the cusp of a new bull market, expect TD Bank stock to surge out of the gate, as it often tends to do.
National Bank of Canada
National Bank of Canada (TSX:NA) stock has been in flux for a few years now. Though it’s far smaller than some of its larger peers in the Big Six, I think it’s a mistake to dismiss the well-run financial because of its size. Arguably, National Bank has more room to grow. And unlike most other regionally focused banks, National seems to be run very conservatively.
Indeed, I’m a big fan of the prudent management team and think the stock’s past five years of solid performance (shares up over 52% in the last five years) are a reflection of the capabilities of its top bosses. At just 9.81 times trailing price to earnings, I view NA stock as a banking underdog that’s been quietly beating the heavyweights at their own game.
My takeaway? The smallest member of the Big Six may be in a spot to post the biggest returns over the next few years.