The Bank of Canada started its rate-cutting cycle in June 2024 and has lowered interest rates for the third time this month. Many market observers believe easing the monetary policy is good for bank stocks, especially Toronto Dominion Bank (TSX:TD).
As of this writing, the financial services sector is up 17.3% year-to-date. Unfortunately, Canada’s second-largest bank has yet to pick up steam following successive rate cuts at home and one in the United States.
While TD is above water thus far on the TSX (+4.71%) and NYSE (+2.68%), the gains are not enticing. The 4.7% dividend yield is attractive but there’s one outperforming dividend superstar I’d buy over the Big Bank stock.
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High-yield, high-flyer
Timbercreek Financial (TSX:TF) is a dwarf compared to TD. However, performance-wise, the high-yield small-cap stock flies high. At $8.12 per share, investors enjoy a 30.4% year-to-date gain and partake in the 8.5% dividend. TD trades at $86.31 per share.
Canada’s Big Five banks have paid dividends for more than 100 years. TD’s 167-year dividend track record lends confidence to invest in the $150.9 billion banking giant. Timbercreek’s dividend history is not lengthy, although it has never missed paying a monthly dividend since July 2016.
Business overview
The $674 million non-bank lender provides short-term (not more than five years), structured financing to commercial real estate investors. Timbercreek invests in structured mortgage loans secured by stable, income-producing commercial real estate. The properties include multi-residential, office, and retail buildings in Canada’s urban markets.
Timbercreek’s conservative lending program and business model ensures repayment or servicing of the loans and very low delinquencies. The mortgage industry faced headwinds and harsh conditions like rising interest rates and declining property prices, yet Timbercreek endured them and kept investors whole on the monthly dividend payments.
Bright outlook
In the first half of 2024 (six months ending June 30, 2024), net income declined 17.7% year-over-year to $29.7 million. Total dividend payments during the period reached $28.6 million. Timbercreek is confident real estate fundamentals will recover as inflation moderates with support from a rate-cut environment.
Notably, Timbercreek maintained conservative portfolio risk from the income-producing commercial real estate. Around 83.4% of the mortgage investment portfolio are cash-flowing properties and 85.6% are first mortgages. The weighted average loan-to-value is 62.3%.
Blair Tamblyn, Timbercreek’s CEO, said, “We continue to have success redeploying capital into high-quality loans as we expand the portfolio back to historical levels.” He adds that the rate cuts should enhance the deal flow pipeline, and increased financing opportunities are expected as transaction activity in most asset classes grows.
According to Tamblyn, the company is well-positioned to deploy capital in the current environment and grow the portfolio through the balance of the year.
Excellent backup
I’m not undermining Toronto Dominion Bank, but I still believe the well-capitalized bank is an anchor stock because of its long-term potential. However, Timbercreek Financial is a suitable and profitable option for income-focused investors. The yield is juicier than TD’s and the payout frequency is monthly. Moreover, you can earn two ways: price appreciation and dividend income.
