The 5-per-cent-guaranteed investment certificate is gone, and 4 per cent could soon be a memory as well.
Meanwhile, in the world of dividend stocks, there’s a varied selection of options with yields of 5 per cent or more. One of them is Toronto-Dominion Bank (TD-T), a onetime banking superstar now in disgrace because its U.S. arm was connected by authorities to money laundering.
With the recent price around $77, TD’s annualized dividend of $4.08 yields about 5.3 per cent. Let’s compare this yield to a GIC in a way that will help you make similar decisions about other high-yielding dividend stocks.
Dividend yields are an indicator of sentiment. Yields move in the opposite direction to share prices, so a falling price means a rising yield. TD’s yield is high for a big bank just now, but it’s worth noting that Bank of Nova Scotia (BNS-T) is the highest-yielding big bank, at 5.8 per cent. Other blue chips are more extreme than that, notably BCE (BCE-T) at 8.9 per cent, Telus (T-T) at 7 per cent and Enbridge (ENB-T) at 6.5 per cent.
There are two risks to consider in a high-yielding blue chip: share price declines and a dividend cut or, worst-case scenario, a suspension. One way to assess the risk to the dividend is the payout ratio, which is the percentage of net income paid to shareholders as dividends. Morningstar DBRS calculates TD’s payout ratio at 109.7 per cent, which is alarmingly high.
However, Morningstar DBRS says this payout ratio falls to an implied 51.6 per cent without considering the expenses TD incurred to settle the U.S. money-laundering case and other non-recurring costs. TD’s dividend does not appear to be at risk of being reduced, although questions remain about the extent to which the bank will be able to deliver the dividend growth investors expect from bank stocks.
The risk of share price declines is another matter. We’ve seen big gains for banks in the past 12 months, but TD shares are a little below the level of 12 months ago and have been weak lately. Any further bad news from the bank could be hard on the share price, an important qualifier for those who appreciate the zero-drama aspect of investing in GICs.
Overall, TD shares are not an obvious landing spot for maturing GIC money or an answer for the investor who cannot pull the trigger on a new GIC at 4 per cent or less. Think of TD as a long-term bounceback candidate with an attractive dividend yield that reflects more risk than all but one of its peers.