1 Bank Stock to Buy Hand Over Fist and 1 to Avoid

Not all Canadian bank stocks fit the bill if you are looking for a healthy combination of growth and dividends.

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When it comes to Canadian bank stocks, stability and dividends are two things that come to most investors’ minds. These are the characteristic strengths of the Big Six Canadian bank stocks. So, if you want to buy into a Canadian bank for these two reasons, any of the Big Six might suffice, but if you are looking for a healthy growth and dividend combination, the choices would be a bit more limited.

From a growth perspective, there is one bank stock you may consider buying hand over fist and one you should avoid.

The bank stock to buy

National Bank of Canada (TSX:NA) is one of the best Canadian bank stocks you can buy for growth and has been doing this for years. It has returned about 284% to its investors in the last 10 years, and most of these returns are rooted in its growth, not dividends. The collective return number is the highest among the Big Six by a considerable margin.

It also reacts both positively and swiftly to trends in the sector. Right now, the financial industry in Canada is going up as a whole, and the index has risen by over 3.8% in the last 30 days alone. National Bank of Canada has embraced this spirit; it has gone up 4.8% over the same period and has experienced over 15% growth since the beginning of this year.

So, if growth is something you prioritize or something you want to add to your portfolio, National Bank is the stock you want to buy from the banking sector. That doesn’t mean it’s not worth buying for dividends. It’s an Aristocrat with a solid payout ratio and dividend-growth history and is offering dividends at a current yield of about 3.65%. This makes it a decent buy for dividends and a good pick for growth.

The bank stock to avoid

It’s worth noting that Toronto-Dominion (TSX:TD) is not a weak stock per se, but if you want to buy Canadian bank stock, then its bear market phase makes it an unsuitable pick. Since the beginning of 2024, the bank has actually slumped 9.7%, which is in stark contrast to the National Bank’s growth over this period.

The slump has yet to lead to the bank being better valued, and the price to earnings of Toronto-Dominion is on the higher side within the banking sector. The dividend yield is quite attractive at 5.2%, so if you want to buy it for dividends, it’s still a valid pick, but if you want a healthy combination of growth and dividends, then it may be best to avoid this bank stock.

Foolish takeaway

It’s important to understand that while the two stocks are currently on different ends of growth potential within the banking sector, that’s not always the case. While the National Bank of Canada is almost always an excellent pick for growth, Toronto-Dominion is also a valid pick (typically). However, its performance in 2024 has not kept up with that trend.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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