My November Watchlist was all about the big five banks in Canada. They all have extensive dividend payment histories and offer appealing long-term dividend growth prospects. Each of these banks has their own mix of segments and geographic exposures. It surely must not come as a huge surprise, but my analysis and screen revealed that the best option to add some diversification and long-term dividend growth to the Niche Fund was to initiate a holding of TD.
It is hard not to like the potential of TD and the other members of the big five. Given I’m just starting to build up the Niche Fund, I thought it would be a great opportunity to add some diversification this month by choosing to initiate a new holding from my Foundation Watchlist. I already hold RY in the Niche Fund, so the opportunity to add another quality Canadian financial equity was a big factor in my decision this month. I immediately ruled out purchasing a USD denominated equity this month, as the CAD is trading very low to the USD, and my last purchase was EMR in October.
TD Bank Group
Headquartered in Toronto, Canada, with more than 85,000 employees in offices around the world, The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group (TD). TD offers a full range of financial products and services to approximately 24 million customers worldwide through three key business lines:
- Canadian Retail including TD Canada Trust, Business Banking, TD Auto Finance (Canada), TD Wealth (Canada),TD Direct Investing and TD Insurance
- U.S. Retail including TD Bank, America’s Most Convenient Bank, TD Auto Finance (U.S.), TD Wealth (U.S.) and TD’s investment in TD Ameritrade
- Wholesale Banking including TD Securities
Source: TD Group Investor Relations
My first screen criteria was attractive valuation. This criteria compares the most recent P/E ratio to the 5 yr average and index average. TD had an attractive P/E ratio of 13.4 as compared to its 5 yr average of 13.7 and the S&P/TSX ratio of 16.5.
The second screen category was payout ratio less than 55%. TD had an attractive 47% payout ratio, which was slightly higher than 46.4% for RY, 46.8% for CM, 49% for BMO and 63% for BNS. While RY and CM were the leaders in the payout ratio screen, TD also fared well. Only BNS offered some concern as to whether future dividends may be at risk.
The third screen criteria, dividend yield greater than 2.5%, did not help much, as each of the big five offer attractive yields. This is an area where Canadian bank stocks really stand out. Each of the big five easily passed this screen, as they all offer very attractive yields greater than 2.5%. TD ranked last out of the big five with a yield of 3.73%, followed by RY with 4.15%, BMO with 4.28%, CM with 4.48% and BNS with 4.61%. Given they all passed this screen, I chose to focus on other factors when determining which equity to choose this month.
After carefully reviewing each of the big five, I recently initiated a modest initial position in TD for 9 shares at $54.5 per share. This new holding will add $17.64 CAD in forward dividend income to the Niche Fund. My aim this month was to diversify my holdings, and initiate a new position in one of my foundation stocks. This purchase represents my second financial stock holding in the Niche Fund. I look forward to building on this with additional holdings of the other big five banks.
Don’t take my word for it alone, but it is truly hard to go wrong with any of the big five. They each offer a proven history of providing value to shareholders through consistent dividend payments and regular dividend increases. TD has consistently paid dividends since 1857, which also happens to be the year Ottawa was chosen to be the capital of Canada!
What are your thoughts on Canadian financial dividend stocks? Do you currently hold TD or any of the other big five (RY, BNS, BMO, CM)?