The Smartest Bank Stocks to Buy for $500 Right Now

Bank stocks are an attractive option for many investors because they tend to offer attractive dividends as well as solid long-term returns. I say “tend to provide” because not all bank stocks are created equal, and not all bank stocks perform well.

If you’re looking for the best bank stock ideas right now, the two picks below have real potential. And the second choice might surprise you.

1. TD Bank: This stock has a proven track record of profitability

When it comes to making money with banking stocks, Toronto-Dominion Bank (NYSE: TD) is a first case study. Over the past 30 years, TD Bank (as it’s better known) stock has posted an incredible total return (including reinvested dividends) of 3,140%. The S&P 500the total return was 1,340% over the same time period.

What made TD Bank’s rise so spectacular? It is partly due to the unique operating conditions of the banking sector in Canada, where regulations encourage industry consolidation. For example, TD Bank is currently the second largest bank in Canada with $1.4 trillion in assets. It is the second largest bank in the US Bank of Americawhich has $3.3 billion in assets, despite the fact that the US banking industry is many times larger than Canada’s. Outsized market share has allowed TD Bank to post profits and returns on equity that its US peers can’t match. TD Bank’s average annual return on equity over the past five years, for example, has been about 13.2%. Bank of America, by comparison, averaged just 9.7%.

To be fair, TD Bank’s performance in recent years has not matched the historical average. Over the past three years, the stock has delivered a total return of just 2% compared to a total return for the S&P 500 of 30%. This underperformance reflects the struggles of the banking sector as a whole. Shares of Bank of America, for example, rose just 0.8% over the same time period. It is also tied to some 2023 US regulatory issues involving the bank’s money laundering controls that TD Bank is trying to resolve. Until these are resolved, TD growth may be somewhat slowed.

Investors could use this underperformance to their advantage. TD Bank currently trades at just 1.4 times book value, a discount from its three-year average of 1.6 times book value. The dividend yield also recently hit new highs and now exceeds 5%. If you’re looking for a bank stock with good value and a solid dividend that’s well covered, TD Bank is for you.

2. Berkshire Hathaway: A secret way to bet on the best banking stocks

Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is not a bank stock, but owns enough bank stock to count. For decades, CEO Warren Buffett has made Berkshire a big investor in a variety of banks. Right now, Berkshire’s portfolio is betting tens of billions of dollars on well-known banks such as Capital One, City Groupand Bank of America, as well as lesser-known banks such as Financial ally and Not Holdings. In total, Berkshire’s portfolio has more than $40 billion invested directly in banking stocks, with another $43 billion bet on financial services companies such as Mastercard, American Express, and Visa. Berkshire is more of a bank stock than many think.

Of course, buying Berkshire stock also exposes you to a wide variety of other businesses, and your direct exposure to banks will be relatively small. But the upside is that you can outsource the bank’s stock to one of the best investors of all time: Warren Buffett. Buffett has outlined his strategy of investing in banking stocks before.

“It’s a business that can be a very good business, when it’s run right,” he told investors in 1996. “There’s no magic to it. You just have to stay away from doing anything stupid.” With Buffett managing your bank stock portfolio, you are much less likely to invest in a bank stock loss.

Despite the fact that the holding recently surpassed a market capitalization of $1 trillion for the first time, Berkshire Hathaway’s valuation is very reasonable, especially considering the quality of the conglomerate. The stock trades at just 1.7 times book value, a figure that is likely overvalued due to massive share buybacks, which increase shareholder value but tend to decrease book book value.

It’s an odd choice as a banking stock, but Berkshire could be a good fit for those looking to add exposure to the banking sector while diversifying away much of their risk.

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Ally 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. Citigroup is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, Mastercard and Visa. The Motley Fool recommends Nu Holdings and recommends the following options: Long January 2025 $370 calls on Mastercard and Short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

The Smartest Bank Stocks to Buy for $500 Right Now was originally published by The Motley Fool