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

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Utility Stocks That Are Smart Buys for Canadians in November

These utility stocks benefit from regulated businesses and generate predictable cash flows that support higher dividend payouts.

Read more »

Start line on the highway
Dividend Stocks

Invest $10,000 in This Dividend Stock for $600 in Passive Income

Do you want to generate passive income? Forget the rental unit! This option will save you the mortgage yet still…

Read more »

Senior uses a laptop computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

TD Bank (TSX:TD) shares are way too cheap with way too swollen a yield for retirees to pass up right…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »