Top Two High-Reward Bank Shares to Invest in Right Away
The U.S. banking system is like the lawless frontier compared to how things are managed in Canada. This is one major reason why, during the Great Economic Downturn, even the largest U.S. banks had to reduce their dividends, while Canadian banking giants such as Toronto-Dominion Bank (TD -0.39%) and Bank of Nova Scotia (BNS 0.31%) did not.
Despite this, these two banks, which I currently favor for their high dividends, are not performing at their peak. However, this could be a good opportunity for investment.
Canada's banks are tightly regulated
Without getting too technical, Canada takes a completely different approach to banking than the U.S. The country's regulators have given a few large banks dominant positions in the industry due to their importance in the economy.
Regulators also have a heavy hand in daily operations. For example, during the Great Recession, Canadian banks were prohibited from increasing their dividends to ensure there was enough financial liquidity available.
Even though there was no real issue, as the largest Canadian banks just paused dividend increases until allowed to resume them, this was quite different from what happened in the U.S., where many banks had to cut their dividends.
This isn't to say that Canadian banks are risk-free. They are far from it. However, strict regulation has left the major players with protected industry positions and, more importantly, generally prudent management teams.
I'm a fan of buying troubled companies. Basically, I mean owning strong companies that are facing temporary problems. When it comes to large banks, which are complex entities, I'm more inclined towards Canadian banks because I believe Canadian regulators are closely monitoring them, to put it mildly. As a result, the risks are reduced compared to U.S. banks, where anything seems possible (like the bank runs in 2023?).
Currently, my preferred banks are the Canadian giants TD Bank, more commonly known as TD Bank, and Bank of Nova Scotia, which is commonly referred to as Scotiabank. Here's why.
TD Bank and Scotiabank are struggling in difficult times
Even though Canadian banks are generally prudent, they are not immune to hardships. I tend to buy stocks during difficult periods because that's when their dividend yields are historically high. Both TD Bank and Scotiabank are currently facing challenges.
Scotiabank's problems are strategic. While most of its Canadian peers focused on expanding into the U.S. market, Scotiabank decided to focus on Latin America. This strategy was sound due to the potential for high growth in emerging economies. However, Latin America's economic volatility left Scotiabank trailing its peers on key performance indicators like earnings growth and return on equity.
Scotiabank is now changing course, aiming to exit less profitable markets and refocus on more promising ones, including the U.S. This will likely be a multi-year endeavor. The goal is to become a finance giant spanning from Mexico to Canada.
I support the Latin American focus, so I'm quite optimistic about the long-term goals. And I'm more than happy to reinvest the impressive 5.6% dividend yield while Scotiabank navigates through this phase. Notably, it has already made strides in the U.S., recently acquiring a roughly 15% stake in Keycorp (NYSE: KEY).
TD Bank's problems are more complicated. Its U.S. division was involved in money laundering, angering U.S. regulators. Consequently, there was a large fine, internal control updates, and a cap on assets. While the first two issues have been addressed, the asset cap will linger as TD Bank cannot grow in the U.S. without regulatory approval.
As a result, the stock has been underperforming. But its dividend yield is currently 5.2%, historically high. The downside is that TD Bank's growth will be slow for some time, possibly several years, as it seeks to rebuild trust with regulators.
However, the Canadian operations are unaffected, and the bank is generally well-managed. I have faith that TD Bank will weather this period and emerge stronger. In the meantime, I'll continue reinvesting the generous dividends and growing my position in one of North America's largest banks.
I'm patient and will wait it out
From a broader perspective, I'm not concerned about the long-term future of these Canadian banks. In fact, both have paid dividends continuously for over a century. Meanwhile, I'm not yet retired, so holding high-yield stocks, which I believe are currently out of favor and reinvesting the dividends, aligns perfectly with my plans.
If this appeals to you, you might want to consider joining me. However, given my confidence in the strength of the dividends, it could be tempting to spend the dividend income. But doing so would forfeit the compounding effect offered by these high dividend yields.
In light of the strict financial regulations in Canada, these high-dividend favored banks, TD Bank and Scotiabank, are currently navigating challenging times. TD Bank's U.S. division faced money laundering allegations, resulting in a fine, internal control updates, and an asset cap, affecting its growth. Meanwhile, Scotiabank's focus on Latin America has resulted in lower performance, but the bank is now aiming to refocus and grow in more promising markets. Despite these issues, the banks' continuous dividend payments for over a century and their current high dividend yields make them attractive options for patient investors.
