The best high-yielding bank stocks to invest $1,000 in right now

Toronto-Dominion Bank (T.D 0.79%) it’s yielding 5.1% right now, which is at the high end of the stock’s historical return range. If that’s not enough to entice you to invest $1,000, that return is also about twice the 2.5% return you’d collect from the average bank using SPDR S&P Bank ETF as a landmark. Before you run out and buy stocks, here’s a deeper look at why TD Bank is the best high-yield bank to buy right now.

TD Bank has a very attractive dividend and business

It’s worth noting that TD Bank’s yield is near its all-time highs, but there’s more context here. The only times in recent history when the yield was this high was during the Great Recession and the early days of the coronavirus pandemic. These were massive economic dislocations, which shows how unusual today’s yield situation is for the bank.

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Before we get to why the yield is so high, however, there are other dividend facts to consider. For example, TD Bank has paid a continuous dividend since 1857. That’s a long time. The bank is based in Canada, where strict government regulations have resulted in the country’s largest banks having entrenched positions in the industry. TD Bank is one of those banks, ranking second only to deposits. This creates a solid business base as the company looks to expand in the United States.

Also notable is Canada’s tough regulatory regime, which has resulted in relatively conservative operations by Canadian banks such as TD Bank. This is something that permeates the bank’s entire culture, not just its Canadian operations. Notably, TD Bank has an investment-grade balance sheet, and its Tier 1 Capital Ratio, a measure of a bank’s ability to withstand financial stress, was the third-best in North America (and the good from Canada) at the end of the year. the bank’s second fiscal quarter.

TD Dividend Yield Data by YCharts

So far, the story here is that of a financially strong and conservatively run bank with a solid core operation that trades at a historically high yield. That’s why you might want to invest $1,000 in the bank today. But you can’t do that until you answer the nagging question: Why is the dividend yield so high?

TD Bank messed up and it will take time to fix the problem

To simplify the matter, TD Bank’s money laundering controls failed, and it is now under regulatory scrutiny because of the problem. The bank has already set aside $450 million to cover the costs, including fines. The price will likely rise from here, and especially its growth plans in the United States will likely stall a bit (US regulators forced it to cancel a planned acquisition). However, TD Bank is very likely to solve this problem. It will take some time, maybe even a few years. But you’ll be well paid to stay, given the historically high yield.

This is where things get a bit more interesting as the situation is similar in some ways to what Bank of America went through the Great Recession. After buying Countrywide Financial, Bank of America struggled and was forced to seek assistance from Warren Buffett. Berkshire Hathaway. This is important because of how Buffett invests.

Without getting too deep into the woods, Buffett likes to buy good companies when they seem to be temporarily out of favor for some reason. Bank of America was a good fit because it had a strong core business that was overshadowed by the mortgage problems it took over when it acquired Countrywide Financial during a housing-led economic downturn. Buffett stepped in to provide capital to shore up the bank’s finances so it could fix its problems and turn around. It took a while, but Bank of America’s solid foundation allowed the bank to shine once again.

BAC data by YCharts

TD Bank is unlikely to need that kind of assistance given that it is still financially strong. TD Bank just needs to update its controls (which it does) and deal with the fines it will face. Given the strong Tier 1 ratio, fines shouldn’t be too high in the long run. Once the bank has regained the trust of US regulators, it should be able to start growing faster again. None of this is going to happen quickly, though, so TD Bank will be tough to own for a while.

TD Bank is a time arbitrage situation

It’s hard for institutional investors to hold onto a stock facing regulatory issues, even if those issues are likely to be resolved over time. Simply put, they have investment committees to answer to. You, as a small investor, don’t. That’s why you can step in to buy TD Bank and collect its huge dividend while you wait for the company to deal with its current situation. Sure, it might take a few years, but it took a few years for Bank of America to fix its problems. That trade has worked very well for Warren Buffett. You may want to consider adding high-yielding TD Bank to your portfolio in a similar play to a struggling bank that will likely be temporary.