Toronto Dominion Bank (TD)
From Cabot Wealth Advisory 4/17/14 Sign up for Cabot Wealth Advisory—it's free!
Today I’ll introduce the first stock in my new series highlighting the best Canadian dividend stocks to buy now. This series is partly a response to subscriber demand for Canadian stock ideas, and partly a recognition of the fact that Canadian waters are an excellent place to fish for great dividend yields. So over the next few months, I’ll profile some of the best buy and hold Canadian stocks for dividend-focused investors.
I found the stocks by running screens for Canadian stocks with good yields, good earnings trends and good IRIS ratings.
My first pick is Toronto Dominion Bank (TD), which is listed on both the TSX and the NYSE and currently yields about 3.6%.
Toronto Dominion is the largest Canadian bank in terms of assets, thanks in part to a successful expansion into the U.S. over the past decade. But while the bank has become more American in its operations, it has maintained the enviable financial discipline of a Canadian bank. Most of TD’s revenues come from traditional operations like retail banking (which accounted for 89% of adjusted net income in the latest quarter), not higher risk investment banking-type activities. TD was one of the few financials (along with some other Canadian banks) that were not forced to cut their dividends during the 2008 financial crisis.
Here’s a five-year chart of the stock showing the price (blue) and rising quarterly dividends (orange):
As you can see, TD pays a slightly variable dividend from quarter to quarter, declared in Canadian dollars. Over the past five years, the annual dividend amount has grown at a compound annual rate (CAGR) of 6.54% per year. Growth has accelerated in recent years, with an 11% increase from 2011 to 2012 and a 12% increase in 2013. And since inception (1993), Toronto Dominion has increased the dividend at an annualized rate of 11% per year.
The current payout ratio is 42%, and the company targets a payout ratio of 40% to 50%. This is generous to investors, but not overly aggressive.
TD’s cash flow supports the dividend growth. Over the past five years, TD’s adjusted EPS have grown at a CAGR of approximately 9% per year. Going forward, the company is targeting adjusted EPS growth of 7% to 10% for the “medium-term.”
Free Cash Flow (FCF) growth is also positive. Over the past two years, FCF per share has nearly doubled from $16.06 to $30.67. (I consider FCF when analyzing dividend-paying stocks because dividends are paid out of cash.)
If you don’t need current income, TD Bank also offers a direct investing option (you must own your shares in your own name) that allows shareholders to reinvest their dividends in TD shares, sometimes at a discount (the discount is at the discretion of management).
For risk-averse investors who want dividend income now or down the road, Toronto-Dominion Bank (TD) is one of my favorite Canadian stocks to buy now. Click here for more information.
|The Toronto-Dominion Bank
King Street West and Bay Street
Toronto, ON M5K 1A2 Canada
Index Membership: N/A
Industry: Money Center Banks
Full Time Employees: 78,748