Dividend investors watching the bank runs taking place in the U.S. market will be justified in thinking there's an investment opportunity amid the fear. However, the bigger question is how do you take advantage of this situation? If you are looking at banking giant Wells Fargo (WFC 0.66%), you should probably shift your sights to Toronto-Dominion Bank (TD 0.21%). Here's why.
More yield, more dividends
If you are a dividend investor, then yield is a key story. And, in this case, Wells Fargo's 3% dividend yield is much smaller than the 4.6% you'd get from an investment in Toronto-Dominion Bank, or TD Bank as most people call it. That's just 1.6 percentage points, which seems small on an absolute level. But it is a 50% income increase when you look at it percentage-wise. That's a massive uptick in the income you can generate.
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What's equally interesting here, however, is that Wells Fargo cut its dividend during the Great Recession. TD Bank did not. Wells Fargo also cut its dividend in 2020. TD Bank did not. Those two periods will be discussed a bit more below, but it should be pretty clear that TD Bank is a much more reliable dividend payer. That said, U.S. investors will have to pay Canadian taxes on the dividends and the actual dividend received will vary with exchange rates. But those seem like modest concessions when compared to the outright dividend cuts from Wells Fargo.
So what happened to Wells Fargo? During the Great Recession it got caught up in the housing crisis as did so many other U.S. banks, including Citigroup and Bank of America. TD Bank and most of its large Canadian peers sidestepped the hit during this period. The cut in 2020 was related to Wells Fargo's operating practices, which essentially incentivized employees to open accounts without customer approval. It has been dealing with regulator scrutiny over this for a long time at this point. TD Bank was accused of similar things, but nothing came of those accusations.
Boring is good
All in, Wells Fargo, despite its iconic name, is probably a bank that most investors should avoid. It just hasn't proven to be a good steward of shareholder capital or a reliable partner to its customers. That's not a business you should want to own.
TD Bank, meanwhile, is heavily influenced by the Canadian government's conservative ethos. Simply put, TD Bank is one of a handful of large banks that have entrenched industry positions in Canada because the government limits competition to ensure industry stability.
In addition to this, Canada is pretty stringent about how banks operate, leading the biggest names in the sector to be generally cautious. That carried over to TD Bank's expanding presence in the U.S. market. So, all in, by design, TD Bank operates in a safer manner than many of its U.S. counterparts. And, given the history, very clearly safer than Wells Fargo.
But so far this discussion has been about the past and present. What about the future? On that score, Wells Fargo is still dealing with the fallout from past transgressions, paying a more than $3 billion fine in late 2022. In other words, it remains under regulatory scrutiny and that probably won't end anytime soon. TD Bank, with a clean record, won't have to worry as much about growing its U.S. footprint. It is currently working on a deal to buy First Horizon, which has been bogged down with regulators and now the bank run issues from March may lead to renegotiation of the deal. But, even if it doesn't get done, TD Bank's really just an East Coast operator. So it can just keep pushing slowly west if it wants to grow. Or it can look for another acquisition candidate.
Better all around
Wells Fargo just reported earnings and they were not bad, all things considered. It just isn't working from a position of strength, thanks largely to the bank's account opening scandal that predates the current bank runs. There are better options. A strong candidate is TD Bank, one of the largest banks in Canada and a growing name in the U.S. market. Not only does it have a materially higher yield, but it has proven to be a much more reliable dividend payer than most of the giant U.S. banks.
