What makes a stock worth buying and holding for decades?
Truthfully, there are too many factors to count. To really be sure that you’re safe holding a stock for decades, you need to know hundreds of things about it and have researched it for many months.
However, there are some factors that correlate with long-term sustainability, one of those being the stock’s dividend track record. If a company pays a dividend and raises it year in and year out, then it’s likely to be a stable long-term hold. In this article, I will explore one such stock I own, have been actively buying, and plan to hold for many decades.
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TD Bank
Toronto-Dominion Bank (TSX:TD) is a bank stock I have a long relationship with. I started buying it back in 2018, held it for a few years, and disposed of it last year. This year, when it dipped below $80, I started buying it again. Like the stocks described at the start of this article, TD has a very long dividend-growth track record. Apart from one interruption in 2021 when bank dividend hikes were banned because of COVID, TD has hiked its payout every year since 2010. The dividend has compounded at 8.8% per year since that year.
The reason why TD started getting cheap this year was because it got investigated for money laundering by the U.S. Department of Justice (DoJ). Some tellers were found laundering money for cartels in 2022, and the bank lacked the internal controls required to catch them. As a result, TD pled guilty to the DoJ’s charges and had to pay out.
Money-laundering probe finished
Now, you might be wondering why I bought TD stock when it was in the middle of such a painful period in its history.
The answer is that the stock got too cheap. When The DoJ’s investigation wound down and TD pled guilty, it ultimately agreed to pay a $3 billion fine and have its assets capped at US$430 billion. These penalties were not nothing, but the $3 billion will be paid out by the end of this year, leaving TD free to earn a normal amount of profit next year. As for the U.S. asset cap: TD can divert the money to doing buybacks, paying special dividends, or any number of things.
A cheap valuation
As a result of its struggles this year, TD is quite cheap. It trades at 10 times adjusted earnings — adjusted earnings meaning earnings per share less the impact of the fine and other non-recurring factors. If next year looks like this year, then TD is cheap. In fact, with the fine in the rearview mirror, TD’s earnings will probably sharply increase next year even if revenue barely budges. So, I believe 10 is the “true” price-to-earnings (P/E) ratio for TD, which makes it cheaper than virtually all other large North American bank stocks.
Foolish takeaway
As a result of its cheapness, TD Bank stock has a 5.2% dividend yield — quite high. Even if the stock price barely budges, I’ll get a decent return in dividends alone. And with TD’s issues in the rearview mirror, I’m confident it will experience some price appreciation as well.
