Better Buy: TD Bank or Royal Bank?

RBC is a top-notch bank and great long-term investment. However, TD Bank is the obvious buy today. Here’s the reason.

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published April 25, 2023 10:30 am EDT

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Toronto-Dominion Bank (TSX:TD) stock and Royal Bank of Canada (TSX:RY) stock are both excellent long-term investments. Why do I say that? They have outperformed the benchmark (using iShares S&P/TSX 60 Index ETF (TSX:XIU) as a Canadian stock market proxy) for the long haul.

For example, since 2007, the exchange-traded fund delivered a compound annual growth rate (CAGR) of 5.9% per year. In comparison, TD stock and RBC stock delivered a CAGR of approximately 9.4% and 9.5%, respectively, in the same period.

One reason they tend to beat the market is that they typically provide higher dividend yields than the benchmark. At writing, TD stock yields 4.6%, RBC stock yields 3.9%, while the XIU yields roughly 3.1%. About 30% of the top bank stocks’ long-term returns to shareholders come from their dividends.

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TD stock

TD Bank is focused on its retail banking businesses in Canada and the United States. It has leading positions in retail banking products and services. It also runs a wholesale banking business. Along with Royal Bank of Canada, it is one of the two largest Canadian banks that are categorized as Global Systematically Important Banks by the Financial Stability Board. As a large bank in Canada, TD enjoys a well-regulated environment that allows it to operate in a favourable oligopoly.

TD stock’s five-, 10- and 15-year dividend-growth rates were 8.7%, 9.4%, and 8.4%, respectively. This is a very solid track record.

Today, the stock has been depressed from the shakeup in U.S. regional banks, as TD Bank owns a meaningful stake of about 13% in Charles Schwab. For comparison, TD stock is down about 5% year to date versus Charles Schwab, which has lost 35% of its value.

At $83.55 per share at writing, TD stock offers a decent dividend yield of 4.6%. As well, the analyst consensus 12-month price target suggests it trades at a good discount of roughly 16%. It also means that it has near-term upside potential of approximately 19%.

RBC stock

Royal Bank of Canada stock generally provides better resilience and better peace of mind for its shareholders. Like TD Bank, RBC also focuses its operations in Canada and the United States, generating about 59% and 25%, respectively, of its revenue from the two countries. Its business is also diversified across personal and commercial banking, wealth management, capital markets, insurance, and investor and treasury services (4%). So, it’s able to generate quality earnings.

At $135.30 per share at writing, RBC stock offers a safe dividend yield of 3.9%. Analysts believe the bank stock is fairly valued with a discount of about 5%.

Is TD Bank or RBC the better buy right now?

Both TD and RBC are wonderful businesses worthy of being core holdings for long-term investment. They survived and came out more profitable through hardships such as the financial crisis of 2007/08 and the COVID-19 pandemic.

Currently, TD stock appears to be a better buy from a valuation standpoint. Additionally, it offers about 18% greater dividend income.