The Toronto-Dominion Bank (TSX: TD) and Bank of Nova Scotia (TSX: BNS) are two of Canada’s best known banks. TD, the country’s second largest bank by market cap, is a major player in both retail and investment banking in Canada and the United States. The Bank of Nova Scotia is a major international financial institution with branches all over the world, most notably in Canada and various Latin American countries.
An interesting question for a Canadian dividend investor to ask is, “Between TD and BNS, which is the better buy?” This question is especially important in light of the fact that TD has run up so much this year. TD, historically a stock that investors count on for its high dividend yield, has run up so much this year that it now has just a 3.7% dividend yield. That is much lower than what investors usually want from Canadian banks. Bank of Nova Scotia, with its 4.6% yield, still delivers the goods. In this article, I explore TD and BNS side by side, so you can decide which Canadian bank is the better fit for your portfolio.
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The case for Bank of Nova Scotia
The case for buying Bank of Nova Scotia stock over TD Bank stock mostly comes down to dividend potential. In the last 12 months (LTM), BNS paid $4.32 worth of dividends. It will pay $4.40 worth of dividends in the next 12 months if the current dividend level is maintained. Using the expected forward dividends and today’s stock price of $94.66, BNS has a 4.6% dividend yield. If you invest $50,000 in it, you get $2,323 back in annual dividends. See the math on that below.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Bank of Nova Scotia | $94.66 | 528 | $1.10 per quarter ($4.40 per year) | $580.80 per quarter ($2,323 per year) | Quarterly |
TD Bank on the other hand has a $114.46 stock price, a $1.05 quarterly dividend, and $4.20 in expected next 12-month (NTM) dividends, giving it a 3.7% dividend yield. If you invest $50,000 into this stock, you only get $1,835 in annual dividends, as the table below shows.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| TD Bank | $114.46 | 437 | $1.05 per quarter ($4.20 per year) | $458.75 per quarter ($1,835 per year) | Quarterly |
This comparison clearly shows Bank of Nova Scotia with a higher dividend yield than TD. So, if short term yield is your absolute #1 criterion for picking investments, you’d pick BNS over TD.
The case for TD Bank
The case for buying TD over Bank of Nova Scotia comes down to pretty much everything except dividends.
TD is more profitable than BNS is. In the last 12 months (LTM), TD had a 33% net income margin and a 17.7% return on equity. In the same period, BNS had a 23% net margin and an 8% return on equity.
TD has also been growing more than BNS, with its earnings rising at about 18% per year over the last five years, while BNS’s earnings have declined.
Finally, despite all of the above, TD stock is arguably also cheaper than BNS, with a 9.8 reported PE ratio and a 3.2 price-to-sales ratio. The same multiples for BNS are 18 and 3.7. For this and the other reasons outlined above, I think TD Bank is a better buy than Bank of Nova Scotia right now.
