Timing is everything in the investment world. A comparison between Bank of America and Toronto-Dominion Bank (TD Bank) clearly illustrates this point. Bank of America was a massive winner if you go back a decade, but if you go back to 2007, the story is vastly different. During the Great Recession, Bank of America was one of the banks that stumbled badly due to taking on too much risk, while TD Bank maintained its conservative approach to banking.
A Decade of Performance
If you had invested $10,000 in Bank of America in 2007, you would have around $7,000 today, assuming you reinvested dividends. In contrast, if you had invested $10,000 in TD Bank in 2007, you would have around $30,000 today. Bank of America’s stock has risen by 190% over the past decade, compared to TD Bank’s roughly 65% gain. However, a closer look at 2007 shows a vastly different story.
The Impact of the Great Recession
If you look at Bank of America’s stock performance from the start of 2007 until today, the stock is still down by roughly 33%. TD Bank, on the other hand, has seen its shares rise more than 190% since the start of 2007. A $10,000 investment in TD Bank in 2007 would now be worth around $23,000, compared to $6,666 for Bank of America. Important differences between the two banks were clearly on display even in 2007.
Conservative Banking in Canada
Canadian regulators have a conservative approach towards their country’s banking system. TD Bank is one of the dominant companies in Canada due to a small number of large companies holding dominant positions with little fear that they will be displaced. There is a general caution in Canada when it comes to bank operations, leading to fairly conservative corporate cultures, which is not true of the U.S. banking market. Prior to the Great Recession, many U.S. banks, including Bank of America, pushed hard into the hot mortgage market, leaving them exposed when the housing market crashed and the economy fell into recession.
Dividends and Regulatory Oversight
Bank of America was forced to cut its dividend to a token penny per share per quarter, resulting in a loss of income for individual investors looking to live off their dividend checks. TD Bank was able to maintain its dividend through the Great Recession due to its conservative nature and regulatory oversight. After the ban on dividend hikes was lifted, TD Bank promptly resumed its dividend growth. TD Bank has been a much better investment choice than Bank of America due to its conservative nature and regulatory oversight during the financial dislocation.
Current State of Affairs
Even today, TD Bank is more conservative, with a Tier 1 Capital Ratio of 16.2%, the second-highest in all of North America, compared to Bank of America’s Tier 1 Capital Ratio of 11.2%. TD Bank’s much more attractive 4.1% dividend yield makes it a good choice for long-term income investors. Bank of America is currently trading at around $35 per share, while TD Bank is trading at around $70 per share.
So, timing and conservative banking practices are key determinants of long-term success in investing. Bank of America has outperformed Toronto-Dominion Bank over the past decade, but it’s a different story if you go back to 2007. TD Bank’s conservative approach to banking has allowed it to weather economic storms and maintain its dividend, making it a better investment choice for long-term income investors.
