There's nothing wrong with going for the average and buying index funds when it comes to investing. But if you are trying to generate investment income you might want to go a more direct route. For example, the average bank yields around 2.5% today, using SPDR S&P Bank ETF(NYSEMKT: KBE) as an industry proxy. KeyCorp(NYSE: KEY), Toronto-Dominion Bank(NYSE: TD), and Bank of Nova Scotia(NYSE: BNS) all offer well more than that and have attractive investment stories to tell.
1. KeyCorp just got the infusion it needed
KeyCorp is a regional U.S. bank. This particular niche of the banking world got hit very hard in 2023 as worried depositors pulled money out of a few troubled banks en masse (a so-called bank run). KeyCorp wasn't one of those banks, which is good news. But it is experiencing some financial strain because of some of its portfolio decisions. Simply put, it needed a helping hand, and Wall Street knew it, which led to a depressed share price.
Here's the thing: KeyCorp inked a deal with the Bank of Nova Scotia to solve this problem. The Canadian banking giant bought 14.9% of KeyCorp for $2.8 billion. That should allow KeyCorp the leeway it needs to reposition its balance sheet while continuing to maintain its dividend. But it appears that investors are taking a wait-and-see approach here because the dividend yield is still a lofty 4.7%. To be fair, the business overhaul could result in a few ugly quarters on the earnings front. But with the cash injection from Canada, it seems highly likely that KeyCorp muddles through just fine.
2. Toronto-Dominion Bank messed up big time
There's no point sugarcoating things; Toronto-Dominion Bank got caught with its pants down. Its money-laundering controls in the United States failed to stop the bank from being used to launder money. It will have to pay a roughly $3 billion fine, update its internal controls, and live under an asset cap until it regains regulator trust. None of this is good news, and Wall Street has reacted by selling the shares, pushing the bank's yield up to a historically high 5.3%. If you think in decades and not days, this is likely to be a buying opportunity.
The biggest problem is really the asset cap, which effectively means that U.S. regulators have to approve any growth plans the company has in the U.S. market. Toronto-Dominion Bank's Canadian operations are unaffected, but the U.S. was expected to be the company's growth engine. So, a few years of stagnation appear to be on tap. However, you'll get paid very well to suffer through those years, given that the 5.3% dividend yield is more than twice the average bank yield. And given that TD Bank has survived and paid a dividend for well over 100 years, it's probably worth giving management the benefit of the doubt on mending this operational shortfall and getting back on the growth track.
3. Bank of Nova Scotia is doing good things
Bank of Nova Scotia isn't just helping KeyCorp out; it is also worth buying itself, thanks to a hefty 5.8% dividend yield. To be fair, the yield is that high because the bank has been lagging behind its Canadian peers on key financial metrics like earnings growth and return on equity. It won't be a quick or easy fix to get back in line with its competitors. However, the bank has paid a continuous dividend since 1833. Once again, it seems logical to give the bank the benefit of the doubt.
The real question, then, is what's going on at the bank? Bank of Nova Scotia chose to skip over the U.S. market and focus on Central and South America as it looked to grow. Although that offered the potential for higher growth from emerging markets, the volatility of those markets resulted in less than desirable results. It is shifting gears, focusing on being a banking powerhouse from Mexico to Canada, and making an effort to increase its U.S. exposure (which helps explain the KeyCorp investment noted above).
Like all of the stories here, this one will not be quick. Bank of Nova Scotia needs to exit some markets, right-size others, and invest more in the areas where it wishes to focus. That will take time, and Wall Street seems to be in a show-me mood, given the huge yield. If you are a long-term dividend investor, however, that could be your opportunity to jump aboard and get paid very well to watch the improvements unfold.
Modest risks, generous (dividend) rewards
High-yield banks aren't always great investments. That's why you need to dig in and understand the reason for the high yield. In the case of KeyCorp, Toronto-Dominion, and Bank of Nova Scotia, the reason is that they are all working through what will be longish turnarounds. But investors are getting paid well via lofty dividend yields. If you can handle owning what are fairly low-risk turnaround plays, you might find that all three of these banks are worth adding to your portfolio in November.
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Reuben Gregg Brewer has positions in Bank Of Nova Scotia and Toronto-Dominion Bank. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
