3 Top Bank Stocks to Buy in October

Warren Buffett’s move to sell shares of Bank of America that Berkshire Hathaway the owner cast a cloud over the banking sector. The prevailing view is that if Buffett is selling bank stocks, perhaps there is a good reason.

While Buffett’s investment views are followed by many, you shouldn’t just follow what an investor does in his own interest. If you do your own homework on banking stocks, you’ll find that there are still some interesting opportunities with potential for performance.

Three examples to take a closer look at now are Toronto-Dominion Bank (NYSE: TD), KeyCorp (NYSE: KEY)and Visa (NYSE:V). Here’s what you need to know about these financial stocks as October begins.

1. TD Bank is paying for a big mistake

Toronto-Dominion Bank, normally called TD Bank, did not have strict enough controls for money laundering in the United States. Some rogue employees did things they shouldn’t have done and the wrongdoing wasn’t caught until it was too late. As a result, TD Bank was forced to cancel a planned merger. It has had to revamp its internal controls and has set aside more than $3 billion to deal with regulatory fines and other costs it expects to come out of this event. That’s the bad news, and perhaps justifiably, it’s caused investors to avoid TD Bank stock.

However, TD Bank is financially strong and is unlikely to end up cutting its dividend because of this issue. This makes the dividend yield of 4.7% quite attractive. The real key here is that TD Bank’s core Canadian operation remains very strong, with the bank ranking second in the country by deposits. This is not a fly-by-night bank that is now about to die out. In fact, it has paid a continuous dividend for over 150 years!

If you think in terms of decades and not days, it seems very likely that TD Bank will weather its current difficulties while continuing to pay investors handsomely for staying in a period that will likely see very little business growth. . In a way, it’s a pretty low-risk comeback story.

2. KeyCorp just got the helping hand it needed

Speaking of turnaround stories, KeyCorp just closed a deal with the Canadian banking giant Bank of Nova Scotia which will bring in about 2.8 billion dollars. It is selling almost 15% of itself to Bank of Nova Scotia, which has been looking for ways to invest in the US market. It’s a win/win for the two banks. Scotiabank, as Bank of Nova Scotia is better known, gets to advance a strategic goal and KeyCorp gets the cash it needs to strengthen its business.

The story continues

KeyCorp was certainly not on the verge of going out of business, but the list of benefits offered by the deal include strengthening its capital position, accelerating plans to reposition the bank’s portfolio, the ability to increase investment in the business and the expectation of an improved earnings outlook in both ​2025 as well as 2026. Or, as the company itself stated, Scotiabank’s investment “(e)llows Key to navigate an uncertain environment from a position of strength and take advantage of market dislocations.”

Is it ideal that KeyCorp needs to do business with Scotiabank? No, not really. But the deal puts KeyCorp in a better position and with a good partner (the two companies hope to explore mutually beneficial investments in the future). Meanwhile, KeyCorp’s dividend yield is 5% today, which is historically attractive. And while it’s a riskier turnaround story than the one playing out at industrial giant TD Bank, given the cash infusion, it looks likely to turn out well.

3. Visa seems pretty cheap right now

The last highlight is kind of a scam because Visa is not a bank. However, it works closely with the banking sector, providing vital payment processing services through its global network. What’s interesting here is that Visa’s price-to-sales ratio is about 16.2 times today, below its five-year average of 17.7 times. The price-to-earnings ratio is 29.7 times, compared to a long-term average of 34.2 times. And the price-to-cash flow ratio is 16.6 times, compared to a five-year average of 19.6 times. The stock’s dividend yield, while only 0.75%, is near the upper end of the stock’s historical yield range. Overall, Visa seems to be attractively priced today.

But the real attraction is the dividend growth. Over the past decade, Visa’s dividend has grown at a whopping 18% annual rate. If it can continue to grow its dividend at a double-digit rate, which seems likely given the duopoly it shares in the payment processing space and the growing use of credit and debit cards, the stingy yield from today could easily turn into a very attractive yield for the purchase price.

To give you some quick numbers, over the past decade, the dividend has grown over 300%, going from $0.12 per share per quarter to $0.52. Here is the magic. The stock started the decade trading at around $50, meaning your return on the purchase price would be over 4% today. Still not impressed? You would also own a stock that is now worth over $275 per share!

If you’re a dividend growth investor looking at the banking sector, this industry provider should also be on your radar. Sure, Visa’s performance isn’t impressive today, but give it enough time and history suggests there’s a good chance you’ll be impressed with your decision to buy this stock.

Two returns and a dividend growth machine

TD Bank and KeyCorp are similar in that they are turnaround stories. TD Bank’s problems, which are regulatory in nature, are different from KeyCorp’s problems, which are more fundamental to the business. But both seem to be floundering, while continuing to reward investors with generous dividends.

Visa is a totally different story, as the company’s strong and growing business continues to allow it to increase its dividend at a very rapid pace. It appears to be on sale today, which means dividend growth investors will want to check it out.

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Reuben Gregg Brewer has positions in Bank Of Nova Scotia and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Berkshire Hathaway and Visa. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

The 3 Best Bank Stocks to Buy in October was originally published by The Motley Fool