Toronto-Dominion Bank (TSX:TD) is one of Canada’s most popular dividend stocks. With a $130 billion market cap, it is the second-biggest company in the country. TD Bank stock has a 5.5% yield and has increased its dividend at a rate of 7.6% per year over the last five years (compounded annual growth). If TD keeps hiking its dividend, then those who buy the stock today will enjoy an even greater-than-5.5% yield in the future.
In this article, I will explore whether TD Bank stock is a good holding for the average Canadian investor. The “Cliff’s Notes” version of my take is that the stock is indeed a good dividend play, but it also faces risks that could inhibit the capital gain portion of total returns going forward.
Dividends galore
One thing that TD Bank stock offers in spades is dividend income. The stock pays out $1.02 in dividends per quarter, which works out to $4.08 per year. At today’s stock price of $73.97, these dividends provide a 5.51% yield. That is extremely high for a bank of TD’s calibre. The big U.S. banks like Bank of America and JPMorgan Chase only yield 2-3%, while Royal Bank of Canada pays out 4%. So, TD Bank has a lot of yield compared to its peer group.
Is the dividend sustainable?
Going by generally accepted accounting principles (GAAP), TD’s dividends are 63% of its annual profit. That is a relatively high payout ratio for a bank, but it’s not as high as the payout ratios seen among real estate investment trusts (REITs) and pipelines. Also, TD’s adjusted earnings are higher than its GAAP earnings: the “adjusted payout ratio” is only 50%. That is about average for TD’s peer group.
TD Bank stock: Are the adjusted earnings legit?
As for whether TD’s adjusted earnings are reliable, I’d say they are fairly trustworthy. The bank keeps taking various charges pertaining to its closed Charles Schwab and Cowen deals, as well as its failed First Horizon deal. Most of TD’s earnings adjustments are about removing these temporary charges. The charges will stop being paid at some point in the future, but we don’t know exactly when. What I would say, therefore, is that TD’s adjusted earnings reflect long-term economic reality, but its GAAP earnings reflect a situation that may persist for a few more years.
One issue that could hold back TD Bank’s dividend growth is its ongoing fentanyl money-laundering scandal. In 2022, TD employees in New Jersey were found laundering money for a Chinese drug cartel. Later, the scandal expanded to New York and Florida. TD has already booked $650 million in fines related to the fentanyl money-laundering scandal. Experts believe that the fines will ultimately reach $2 billion. If the fines stop there, then TD will be fine.
If, however, this scandal spirals into a multi-year-long soap opera with every U.S. federal agency and East Coast State finding TD committing wrongdoing on its turf, then the fines could go much higher. Exactly how high, I can’t say. However, Wells Fargo, Bank of America, and JPMorgan Chase all paid fines that added up to tens of billions of dollars. Bank of America ultimately paid out $30.6 billion over a decade because of illegal business dealings with a company called SMC. If TD’s fentanyl scandal fines approach that scale, then its stock will be down for a good while to come.
Foolish takeaway
Is TD Bank stock a good fit for your portfolio? I personally find it a good fit for mine, but I wouldn’t encourage others to invest the same way I do. TD’s biggest risk factor — the fentanyl scandal — is a serious one. It could hold back total returns for years. However, the dividend itself appears safe.
