Those looking at the Canadian banking sector may notice that it is dominated by five large players. That’s mostly for good reason, as the Canadian regulatory system is really set up around the infrastructure provided by these large players.
The question is which bank stock may be the best option in this current environment. I’ll compare and contrast two key players and give my verdict at the end.
TD Bank
A massive player in the Canadian financials space, Toronto-Dominion Bank (TSX: TD) is one many investors look to for its growth. This is a bank that’s largely outpaced its Canadian peers on the growth front, mainly due to its U.S. exposure. In fact, TD has more retail branches in the U.S. than in Canada after years of acquisitions south of the border.
This growth is reflected in the long-term chart shown above. And while TD stock has traded relatively rangebound for the past four years, it’s also a company that’s grown over this time, making its valuation even more attractive.
With a 5.4% dividend yield and trading at just 12 times earnings, it’s hard to find a more fundamentally sound stock in the market right now. Of course, risks related to both the U.S. and Canadian consumer via high debt loads have weighed on the company of late (and could increase if we do get the recession many are calling for). But over the long term, this is a stock that’s proven to be worth buying on the dip, for Canadian investors looking for exposure outside of the domestic market.
Scotiabank
Another top Canadian bank that provides geographic diversification is Bank of Nova Scotia (TSX: BNS). Scotiabank is a Canada-based banking giant that focuses on the core Canadian market but also has operations throughout Latin America in some of the highest-growth markets out there.
Like TD, Scotiabank has seen its stock price stagnate in recent years, for many of the same concerns. In fact, its pullback from the recent 2022 peak has been more noticeable, leading to an even higher dividend yield of 6.8% and a price-earnings multiple just over 10 times.
At these levels, one could argue that Scotiabank is the better pick from a dividend and value standpoint. That said, any company with a dividend yield nearing 7% is one the market may be pricing in future turmoil. So, there are some clear risks tied to this stock that investors ought to consider.
If we do see a recession that’s global in nature, Scotiabank could be hit even harder than TD. Thus, it’s a higher-risk, higher-dividend, cheaper stock providing more upside for long-term investors if they stick with it, but more downside (likely) during a downturn for many of the same reasons.
For those with a long-term investing time horizon, owning both socks here may make sense to balance out these risks. I think those seeking stability and security may want to opt for TD, and those seeking a bit more upside (and are more aggressive) may prefer Scotiabank. It’s really up to the individual investor preference in this regard.
