Are Bank Stocks Safe Bets to Outperform the TSX?

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has seen its stock price climb 87% in the past 10 years, but is there a better bank stock to invest in?

| More on:
win

Bank stocks have a reputation for being stable and secure investments that you should be able to generate decent returns from. I am going to look at three of the biggest banks in Canada to see if that is true, and how bank stocks have done in comparison to the market.

10-year performance

In the past 10 years, the TSX has yielded returns of just 14%. It was outperformed by all the major bank stocks during this time.

Specifically, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) produced returns of 87% in the last decade, followed by Royal Bank of Canada (TSX:RY)(NYSE:RY), which saw its share price increase by 72% over the same period.

However, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) barely beat the market with its share price increasing by just over 16%. One reason for the discrepancy between the bank returns could be the CIBC’s higher exposure to the Canadian market.

TD, which did the best of the three banks, has a greater presence outside Canada and has many locations in the United States.

Five-year returns

If we shorten the range of time to the last five years, then the three bank stocks have once again outperformed the TSX’s 23% returns.

This time, Royal Bank leads the way with its share price increasing by over 70%, followed by TD’s stock appreciating 56%, and CIBC again yielding the lowest return of just 41%.

Returns in the past year

The last year has not been particularly strong, and the TSX has barely been positive with returns of just over 1%. The banks stocks outperformed the TSX again during this period, but the gaps were not as wide as Royal Bank produced 15% returns, TD increased 11%, and CIBC yielded 6%.

If we shorten the window to just this calendar year, during which the TSX has been down by 2%, then the only bank to outperform the market is Royal Bank with a 1% return. CIBC has returned a loss of over 2% so far this year, and TD has been the worst performing for 2017 with a loss of almost 4%.

Summary

We can see that, typically, the banks have outperformed the TSX over all time periods; however, CIBC has typically been the poorest performing of the three banks here.

Perhaps it is unsurprising that TD has done the worst in 2017 since it has been a tumultuous year south of the border, and TD has the largest exposure there.

CIBC might see the most upside going forward

With CIBC making headway into the U.S. market with its recent acquisition of PrivateBancorp, it will likely see less of a correlation with the TSX’s returns and have more impact from the U.S. economy.

The gap between the returns of the CIBC and the other two banks is likely to shrink as a result of its reduced dependence on the Canadian economy.

Dividends

Another consideration when selecting a bank to invest in could be the dividends offered. Currently, both Royal Bank and TD offer similar dividend yields of approximately 3.7%, while CIBC’s payout of 4.7% might make it an attractive option for dividend investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any stocks mentioned.

More on Dividend Stocks

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »

young people stare at smartphones
Dividend Stocks

GST/HST “Vacation”: Everything Canadians Need to Know

The GST/HST "vacation" is a little treat for the holidays, along with a $250 payment. What should you do with…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »