Bank stocks are often seen as boring and conservative investments by new investors, but they can also offer attractive dividends and steady returns in the long run. This is one of the key reasons why most wealthy and experienced investors across the world, including Warren Buffett, always prefer to have some exposure to the banking sector in their portfolios.
In addition, most Canadian bank stocks have witnessed a downside correction over the last two years as the higher interest rate environment has reduced their profit margins and loan growth. However, this also means that many bank stocks look undervalued and offer attractive entry points for long-term income investors who want to benefit from the eventual recovery of the sector.
One of the best dividend-paying bank stocks to buy now
One of the best dividend-paying Canadian bank stocks to buy now and hold for the long term is Toronto-Dominion Bank (TSX: TD). With a market cap of $138.1 billion, it’s currently the second-largest bank in Canada, as its stock trades at $77.95 per share with nearly 9% year-to-date losses. At this market price, TD stock offers an attractive 5.2% annualized dividend yield and distributes its payouts on a quarterly basis.
While TD is yet to announce its April quarter results, its total revenue in the 12 months ended in January 2024 rose 9.3% YoY (year over year) to $52.5 billion. Its adjusted earnings in these 12 months, however, declined by 8.9% YoY to $7.76 per share as the ongoing macroeconomic challenges continued to increase its provisions for credit losses.
On the positive side, its net profit in the January quarter surged dramatically by 79% YoY to $2.8 billion. These recent improvements in its profitability were driven primarily by higher fee income from its market-driven businesses and the inclusion of TD Cowen, coupled with volume growth and margin expansion in TD’s Canadian personal and commercial banking segment.
What could help this bank stock recover fast?
Although TD Bank’s profitability saw a major improvement in the January quarter, its U.S. retail banking division continued to face challenges due to the difficult macroeconomic environment and competitive pressures. However, I expect this financial growth trend to improve in the coming years as lower interest rates could boost consumer spending and loan demand.
This positive outlook is also reflected in Street analysts’ forecasts for TD’s future earnings. Notably, analysts currently expect TD Bank’s earnings to decline by 2.7% YoY in its fiscal year 2024 (which will end in October 2024), still showcasing an improvement from its earnings decline rate of 4.3% in its fiscal 2023. To add optimism, Street expects TD to post strong 6.8% positive growth in its annual earnings in the next fiscal year.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | FREQUENCY | TOTAL ANNUAL PAYOUT |
| TD Bank | $77.95 | 100 | $1.02 | Quarterly | $408 |
| Prices as of May 17, 2024 |
Moreover, TD Bank’s strong capital position and diversified revenue sources could help it absorb any potential delay in economic recovery and support its long-term earnings growth. Given these positive fundamental factors, it could be the right time for bank investors to buy this high-quality dividend stock at a bargain right now and hold it for years to come. Interestingly, if you buy 100 shares of TD Bank with an investment of around $7,795 right now, you can expect to earn around $408 every year from its safe dividends, which are also very likely to grow in the coming years.
