Dividend investors watching the bank runs taking place in the U.S. market will be justified in thinking there's an investment opportunity amid the fear. However, the bigger question is how do you take advantage of this situation? If you are looking at banking giant Wells Fargo (WFC 0.87%), you should probably shift your sights to Toronto-Dominion Bank (TD 2.39%). Here's why.
More yield, more dividends
If you are a dividend investor, then yield is a key story. And, in this case, Wells Fargo's 3% dividend yield is much smaller than the 4.6% you'd get from an investment in Toronto-Dominion Bank, or TD Bank as most people call it. That's just 1.6 percentage points, which seems small on an absolute level. But it is a 50% income increase when you look at it percentage-wise. That's a massive uptick in the income you can generate.
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What's equally interesting here, however, is that Wells Fargo cut its dividend during the Great Recession. TD Bank did not. Wells Fargo also cut its dividend in 2020. TD Bank did not. Those two periods will be discussed a bit more below, but it should be pretty clear that TD Bank is a much more reliable dividend payer. That said, U.S. investors will have to pay Canadian taxes on the dividends and the actual dividend received will vary with exchange rates. But those seem like modest concessions when compared to the outright dividend cuts from Wells Fargo.
So what happened to Wells Fargo? During the Great Recession it got caught up in the housing crisis as did so many other U.S. banks, including Citigroupand Bank of America. TD Bank and most of its large Canadian peers sidestepped the hit during this period. The cut in 2020 was related to Wells Fargo's operating practices, which essentially incentivized employees to open accounts without customer approval. It has been dealing with regulator scrutiny over this for a long time at this point. TD Bank was accused of similar things, but nothing came of those accusations.
Boring is good
All in, Wells Fargo, despite its iconic name, is probably a bank that most investors should avoid. It just hasn't proven to be a good steward of shareholder capital or a reliable partner to its customers. That's not a business you should want to own.
TD Bank, meanwhile, is heavily influenced by the Canadian government's conservative ethos. Simply put, TD Bank is one of a handful of large banks that have entrenched industry positions in Canada because the government limits competition to ensure industry stability.
In addition to this, Canada is pretty stringent about how banks operate, leading the biggest names in the sector to be generally cautious. That carried over to TD Bank's expanding presence in the U.S. market. So, all in, by design, TD Bank operates in a safer manner than many of its U.S. counterparts. And, given the history, very clearly safer than Wells Fargo.
But so far this discussion has been about the past and present. What about the future? On that score, Wells Fargo is still dealing with the fallout from past transgressions, paying a more than $3 billion fine in late 2022. In other words, it remains under regulatory scrutiny and that probably won't end anytime soon. TD Bank, with a clean record, won't have to worry as much about growing its U.S. footprint. It is currently working on a deal to buy First Horizon, which has been bogged down with regulators and now the bank run issues from March may lead to renegotiation of the deal. But, even if it doesn't get done, TD Bank's really just an East Coast operator. So it can just keep pushing slowly west if it wants to grow. Or it can look for another acquisition candidate.
Better all around
Wells Fargo just reported earnings and they were not bad, all things considered. It just isn't working from a position of strength, thanks largely to the bank's account opening scandal that predates the current bank runs. There are better options. A strong candidate is TD Bank, one of the largest banks in Canada and a growing name in the U.S. market. Not only does it have a materially higher yield, but it has proven to be a much more reliable dividend payer than most of the giant U.S. banks.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.
Alright, buckle up because we're diving deep into the world of dividend investing and the fascinating dynamics of the banking sector. I'm no stranger to the intricacies of financial markets, especially when it comes to evaluating the performance of banking giants. Let's dissect this article and break down the concepts involved.
Firstly, the article points out the investment opportunity presented by bank runs in the U.S. market. Now, for those unfamiliar, a bank run occurs when a large number of customers withdraw their deposits from a bank due to concerns about the bank's solvency. This situation can create a potential investment opportunity, and seasoned investors often look for undervalued assets during such times.
The focus then shifts to Wells Fargo and Toronto-Dominion Bank (TD). One key metric for dividend investors is yield, representing the annual dividend income as a percentage of the investment. Wells Fargo offers a 3% dividend yield, while TD boasts a higher 4.6% yield. That might seem like a mere 1.6 percentage points difference, but in percentage terms, it's a substantial 50% increase in income potential. This is a crucial factor for dividend-focused investors.
What makes TD stand out, however, is its track record of not cutting dividends during challenging times. Wells Fargo, on the other hand, experienced dividend cuts during the Great Recession and in 2020. This history showcases TD as a more reliable dividend payer, a factor highly valued by investors seeking stable income streams.
The article delves into the reasons behind Wells Fargo's dividend cuts, highlighting its involvement in the housing crisis and questionable operating practices, including incentivizing employees to open accounts without customer approval. In contrast, TD managed to navigate these issues and maintain a clean record. This reliability is a significant factor contributing to TD's appeal.
Beyond the past and present comparisons, the article explores the future outlook. Wells Fargo is still grappling with regulatory scrutiny, evidenced by a hefty fine in late 2022. This ongoing scrutiny could impact its ability to grow and operate efficiently. TD, with its clean record, is better positioned for future growth, as evidenced by its potential acquisition of First Horizon.
The article also touches on the regulatory environment in Canada, emphasizing that TD operates in a more conservative manner due to government limitations on competition. This conservative approach contributes to the bank's stability, making it an attractive option for investors looking for a safer bet.
In conclusion, the article suggests that despite Wells Fargo's recent earnings report not being terrible, it may not be the best option for investors. TD emerges as a strong candidate, being one of the largest banks in Canada, with a higher yield and a proven track record of reliable dividend payments. The future outlook for TD appears more promising, given its clean record and strategic growth plans.
So, if you're a dividend investor eyeing the banking sector amid market turbulence, Toronto-Dominion Bank seems to be the beacon of stability and potential returns in this complex financial landscape.
