A Dividend Bank Stock I’d Buy Over TD Stock Right Now

TD stock has long been a strong dividend and growth provider. However, recent issues could cause investors to think twice.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published November 15, 2024 4:10 pm EST

| More on: BMOTD

Toronto-Dominion Bank (TSX: TD) has long been a staple for Canadian dividend investors, thanks to its impressive track record of regular, growing dividend payments. This has helped it remain a giant in the dividend world, providing reliable returns to shareholders. TD stock has successfully expanded beyond Canada into the United States. And with strong performance across its retail and commercial banking sectors, it’s no wonder it’s held in high regard. Yet, recent scrutiny over anti-money laundering (AML) practices has started to cast a shadow over its otherwise sterling reputation, raising questions about its future stability in the dividend arena.

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What happened?

TD stock faced a US$3 billion fine due to lapses in its AML compliance, a situation that has alarmed both investors and regulators. Although it’s still early to see the full impact, penalties and heightened scrutiny from U.S. regulators could pressure TD’s balance sheet. Such fines and regulatory pressures inevitably affect investor confidence, potentially impacting TD’s capacity to continue its dividend growth at historical rates.

Bank of Montreal (TSX: BMO) presents a strong case as an alternative dividend stock. BMO, established over 200 years ago, has a solid footing in Canada and a growing presence in the United States. BMO’s recent earnings indicate resilience. With a profit margin of 21.2% and a forward annual dividend yield of 4.74%. Slightly lower than TD stock’s, but with a much lower payout ratio of 69.5% compared to TD’s high 93.06%. This indicates that BMO has a larger cushion to maintain dividends and potentially grow them over time.

More advantages

One key advantage BMO holds over TD stock in today’s regulatory environment is a cleaner record concerning AML compliance. While all large banks face regulatory scrutiny, BMO hasn’t experienced the same degree of AML issues that have plagued TD stock recently. For risk-averse dividend investors, this difference could make BMO a more attractive choice, offering stability and fewer regulatory headaches.

BMO’s upcoming fourth-quarter (Q4) 2024 earnings report, scheduled for December 5, 2024, will provide further insights into its financial health and capacity to sustain dividends. BMO has consistently posted solid performance. And its diversified services, spanning wealth management, personal, and commercial banking, offer multiple income streams that could offset challenges in specific sectors. This diversification, alongside prudent financial management, makes BMO’s future outlook appear robust, especially for dividend-focused investors.

Recent performance

TD stock’s recent quarterly performance showed a profit margin of 15.72%, slightly lower than BMO’s. And a return on equity of 7.33%, indicating it’s still a strong performer. However, the increased scrutiny and penalties for AML compliance could put TD’s financial stability to the test in the coming quarters. Investors may need to factor in the potential for further costs or restrictions if regulators intensify their focus on TD stock’s compliance shortcomings.

In terms of past performance, TD and BMO have maintained relatively stable dividends over the years. Yet, BMO’s lower payout ratio suggests that it might have more room to grow its dividends in the future. TD’s dividends have grown steadily. Yet the strain of regulatory fines could limit its ability to sustain growth at the same pace if similar issues continue to arise.

From a valuation perspective, BMO’s trailing price-to-earnings (P/E) ratio of 15.06 and forward P/E of 12.02 indicate it’s trading at a reasonable price, especially considering its strong earnings growth. This is attractive for investors seeking value. Meanwhile, TD stock’s valuation metrics are slightly higher, possibly reflecting some investor caution due to the recent AML concerns. BMO’s stable performance and lower payout ratio might position it as a better option for investors seeking dividend reliability.

Bottom line

TD stock remains a dividend giant, but regulatory issues add an element of uncertainty. For a more conservative choice with strong fundamentals and fewer regulatory risks, BMO could indeed be a superior option for Canadian investors.