Contrarian Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) investors are always searching for unloved dividend stocks that have good core businesses but have fallen on tough times.
Buying TSX stocks when they are out of favour takes courage and the patience to ride out additional turbulence, but the long-term rewards can be significant when a turnaround occurs.
TD Bank share price
TD (TSX:TD) is a good example of a top TSX dividend stock that is going through a rough patch. The share price fell from $108 in early 2022 to as low as $73.50 last month. TD stock is down 10% in the past three months, and still only trades near $78 at the time of writing after the recent bounce.
Canadian bank stocks across the board faced headwinds through most of 2022 and 2023 as the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to get inflation under control. High interest rates are normally positive for banks due to the boost the banks can get on net interest margins. However, the size of the rate hikes over such a short period of time put a lot of businesses and households with variable-rate loans in a tight spot. This led to a sharp rise in provisions for credit losses (PCL) at TD and its peers.
As soon as the central banks indicated they were done raising rates in late 2023, market sentiment switched from fears of a deep recession to optimism that rates would start to fall in 2024 and help the economy navigate a soft landing. This led to a rally in the bank sector that took many stocks to new all-time highs.
TD, however, missed out on this party. The company ran into trouble with U.S. regulators for not having adequate systems in place to identify and prevent money laundering. In late 2024, the U.S. fined TD more than US$3 billion and put an asset cap in place on TD’s American operations. This has effectively put growth in the American market on hold. TD invested billions of dollars over the past two decades to build a large U.S. business that runs from Maine down the east coast to Florida. TD is currently among the 10 largest banks in the United States based on its customer count. As such, the asset cap is a big hit to the bank’s growth ambitions.
Upside
TD’s overall business remains very profitable, anchored by the Canadian operations. The new chief executive officer in 2025 will focus on streamlining the business to drive efficiency and get a new growth strategy put in place.
The bank has a solid capital position to ride difficult conditions, and the dividend should be safe. At the time of writing, investors can get a 5.4% dividend yield from TD stock.
The bottom line on TD
TD will likely be in transition for much of 2025. That being said, most of the bad news should already be reflected in the share price. Investors will have to be patient, but those with a contrarian strategy might want to put TD stock on their radar at this level.
