Toronto-Dominion Bank: A Top Dividend-Growth Stock for Your TFSA to Start 2018?

Does Toronto-Dominion Bank (TSX:TD)(NYSE:TD) deserve to be on your TFSA radar?

| More on:
The Motley Fool

Canadian savers are about to get an extra $5,500 in Tax-Free Savings Account (TFSA) contribution room.

This will push the maximum to $57,500 for anyone who was at least 18 years old in 2009, when the TFSA was launched.

The TFSA is an attractive option for investors of all ages. Retirees can use the TFSA to earn tax-free income to supplement their pensions payments, while young investors can take advantage of the vehicle to begin building a retirement fund.

With interest rates at such low levels, many Canadian investors are turning to dividend stocks to boost their returns.

Let’s take a look at Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see why it might be an interesting pick.

Reliable income

TD is often cited as the safest of the big banks due to its heavy focus on retail banking. The personal and commercial banking segment tends to be more stable than other activities, such as capital markets, which can see earnings fluctuate significantly from one quarter to the next.

Most people are familiar with TD’s Canadian business, but the bank has invested heavily in building a U.S. presence. In fact, TD operates more branches south of the border than it does in the home country. The U.S. banking group provides a hedge against weakness in the Canadian economy, and earnings can get a nice boost when the American dollar strengthens against the loonie.

Housing risk

Some investors are concerned the Canadian banks could be hit by a downturn in the Canadian housing market. It’s true that a total meltdown would be negative, but most analysts predict a gradual decline in house prices.

TD held $265 billion in Canadian residential mortgages at the end of its latest quarter. Insured loans represent 42% of the portfolio, and the loan-to-value ratio on the rest is 50%. This means house prices would have to fall significantly before TD saw a material impact.

Dividend growth

The bank has a strong track record of dividend growth and is also returning cash to investors through share buybacks. In the past quarter alone, TD repurchased eight million shares.

Over the past 20 years, TD’s compound annual dividend-growth rate is about 10%. Management is targeting 7-10% annual earnings per share (EPS) growth, so dividend increases should continue at a healthy clip.

In fiscal 2018, adjusted EPS increased 14% compare to the previous year, so the bank is capable of exceeding its guidance.

Should you buy?

As interest rates rise, some borrowers will find themselves in a difficult situation and TD could see defaults increase, but higher rates are generally a net positive for the banks.

TD should continue to deliver solid results in the coming years, and the dividend is about as safe as you are going to find in the Canadian market.

The stock isn’t cheap, but TD should continue to be a solid buy-and-hold pick 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 Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

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 »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »