If you are trying to find a good dividend stock, there's something to be said for consistency. You will also want to focus on financially strong companies. On both of these fronts, you will be hard-pressed to find better options than Royal Bank of Canada(NYSE: RY) and Toronto-Dominion Bank(NYSE: TD). Here's what you need to know about these Canadian financial giants and why they could provide you with decades of passive income.
Canada's banks are highly regulated
The very first thing you need to know about Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) is that they both hail from Canada. This is important when you are looking at banks because banking regulation is handled differently in different countries. Canada is far more strict with its banks than the U.S. government is with its financial institutions.
Image source: Getty Images.
This has resulted in two important things that investors will want to know about. First, Canadian banks tend to operate in a conservative manner both domestically and abroad. Second, the extra regulation has, effectively, resulted in the entrenchment of the country's largest banks. This provides a strong business foundation from which these banks can grow. RBC and TD are among the largest banks in Canada.
Going strong for more than a century
So, right off the bat, RBC and TD have some attractive attributes. But that's not the end of the story. Royal Bank of Canada has paid uninterrupted dividends since 1870. Toronto-Dominion Bank has paid dividends since 1857. While past strong performance is no guarantee of future success, these two Canadian finance giants have clearly proven that they are reliable dividend payers.
Notably, both of these banks maintained their dividends right through the Great Recession, while many of the largest U.S. banks cut their dividends. Canadian bank regulators forbid the banks from raising their dividends during this period, but the dividends got back into growth mode once regulators allowed for it again.
Ready for what comes next, even if it's bad
So these banks continued to pay investors through the Great Depression and the Great Recession. That's great, but what about the future? This is where the Tier 1 ratio comes in, which is a measure of a bank's ability to weather financial turmoil. Higher percentages are better on this metric.
At the end of the fiscal first quarter of 2024, TD Bank had a Tier 1 ratio of 13.9%. It proudly proclaimed that this was the second-best Tier 1 ratio in all of North America. That's impressive and indicates that only one bank in the region is better prepared for adversity than TD Bank. RBC's Tier 1 ratio at the end of the same quarter was 14.9%. In other words, RBC is that one bank. Simply put, these are the two best-positioned North American banks, financially speaking.
Looking forward to more dividends
The long-term future for both of these reliable passive income stocks is going to be driven largely by expansion into the United States as they each work to build on their strong Canadian banking foundations. There's plenty of opportunity for both given that the U.S. market is highly fragmented (and notably allows for acquisition-driven growth). So while these two Canadian giants continue to expand for decades to come, dividend investors can collect hefty yields. To put some numbers on that, RBC's yield is roughly 4.1%, and TD Bank's yield is 4.9%. Both are well above what you would get from an S&P 500 index fund (1.3%) or the average bank today (about 2.9%), using SPDR S&P Bank ETF as a proxy.
Should you invest $1,000 in Toronto-Dominion Bank right now?
Before you buy stock in Toronto-Dominion Bank, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Toronto-Dominion Bank wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of March 11, 2024
Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
