TD (TSX:TD) is a core holding for many self-directed Registered Retirement Savings Plan (RRSP) investors. The stock pulled back in recent weeks after a big rally to finish 2023. Investors are now wondering if TD stock is undervalued again and good to buy for a retirement portfolio focused on dividends and total returns.
TD share price
The stock trades near $82 at the time of writing compared to almost $87 a few weeks ago. TD surged from $76 in late October, so there has been some volatility in the past few months, and TD is still way off the 2022 high of around $108 that it reached at the peak of the post-crash recovery.
Weakness over the past two years is largely the result of aggressive interest rate hikes in Canada and the United States. TD has large retail banking operations in both countries, and markets have been concerned that the battle to get inflation under control will lead to an economic downturn and a wave of personal and commercial bankruptcies as people and businesses struggle to cover the jump in their debt payments.
TD set aside $2.9 billion in fiscal 2023 to cover potential bad loans. This is up from $1.07 billion in the previous year, so the strains of rate hikes are evident in the loan portfolios. On the surface, the $3 billion amount looks big, but it is tiny relative to the size of the overall loan book that is still in good shape.
That being said, the longer the Bank of Canada and the U.S. Federal Reserve keep rates at current levels, the more likely it is that TD and its peers will have to increase the provision for credit losses (PCL). TD is sitting on significant excess capital after it cancelled plans for a big U.S. acquisition last year. The cash hoard will help the bank navigate any unexpected market upheavals. TD also plans to use the money to grow the American business organically over the next few years.
Bond markets are pricing in anticipated rate cuts in 2024 in both Canada and the United States. Investors will want to keep an eye on inflation reports in the coming months to see if inflation remains sticky or continues to trend lower. If rates remain at current levels through to 2025, there could be another downturn in the bank sector.
TD dividend
TD recently increased the dividend and has a great track record of distribution growth. Investors who buy the stock at the current share price can get a 5% yield. Steady dividend growth is one reason the share price has moved steadily higher over the long run.
Is TD good for your RRSP?
TD pays an attractive dividend that should continue to grow. Ongoing volatility should be expected, but buying this stock on pullbacks has historically proven to be a profitable move for patient investors. In addition, you get paid well to ride out some turbulence. If you have some RRSP cash to put to work, this stock deserves to be on your radar.
