Written by Adam Othman at The Motley Fool Canada
The financial sector in Canada experienced a steep decline a few days ago, and while it has already started to recover, that decline could be a good indicator of a correction ahead. The financial sector, the backbone of the banking sector, has been on the rise for eight to ten months.
Most of the banks grew at a pace quite far from their usual growth pattern. Initially, it was just growth fueled by the recovery. Then, it was reinforced by successful consecutive quarters, solidifying and boosting investor confidence in banks. But the long-awaited correction could be there to disrupt the bullish momentum.
And if that drags bank stocks down dramatically, you can buy them at a discount and guarantee better performance. And the best place to start the “bank buying frenzy” would be the two giants, Royal Bank of Canada (TSX: RY) (NYSE: RY) and Toronto-Dominion (TSX: TD) (NYSE: TD).
The second largest bank in Canada
TD is the more US-oriented of the two banks, albeit by a very low margin. About 29% of its income came from retailing in the United States and it is among the top ten banks in the United States. Another distinguishing factor of its revenue is its wholesale business, which accounted for around 9% of revenue in the third quarter of 2020.
Another reason for think about TD would be its powerful digital user base. The bank has around 15.2 million active digital users, which is significantly more than RY 7.9 million. And since this is the next frontier in banking, TD might have a slight edge.
Bank stocks have risen by around 34% in the past 12 months and, due to the recent crisis, the yield has risen to 3.8%. If it continues to drop, you may be able to get a return of 4% or more. The potential for capital appreciation, especially considering the past five years (aside from the post-crash surge), is modest at best. However, if we go back a little further, things look relatively more promising.
Largest bank in Canada
Royal Bank of Canada has an impressive international presence. Only about 58% of its revenue in the last quarter came from the country. The remainder came from the United States (26%) and a few other international markets. Geographically, it is more spread out, which gives it better opportunities for growth.
But that’s not the main reason to consider RY over TD. RY offers more consistent growth, which is pretty evident both before and after the pandemic crash. RY’s five-year returns and 10-year CAGR are also significantly better than TD’s. The yield is a little lower (3.44%).
RY offers more stability and a better physical footprint. Its investment banking segment is also quite solid. If it starts to focus more on its digital presence and user base and starts making longer leaps into the digital realm, it will become an even more compelling choice.
Compared to TD, Royal Bank is a bit overvalued. But the collective growth and dividend package it offers could be slightly better than TD’s, which doesn’t make it a clear winner. If you are determined to choose one, it might be better to go with RY, but it would still be a good idea to add both. dividend stocks to your wallet.
The post Should you buy RBC (TSX: RY) or TD (TSX: TD) stocks? first appeared on The Motley Fool Canada.
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Foolish contributor Adam Othman has no position on any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.