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Why investors should consider the lowest-yielding Big 6 bank

As measured by dividend yield, Toronto-Dominion Bank is the favourite of investors among the Big Six banks.

Yields can be seen in some cases as a gauge of investor sentiment – lower yields suggest a robust share price, while higher yields suggest investor concern. TD’s dividend yield as of mid-April was 3.81 per cent, lowest of the Big Six. RBC and Bank of Montreal were next at 3.9 per cent, followed by National Bank of Canada at 4 per cent, Bank of Nova Scotia at 4.3 per cent and Canadian Imperial Bank of Commerce at 4.7 per cent.

TD’s low yield can be explained in part by its status as the best dividend grower among banks in the past five years. TD’s annualized five-year dividend growth rate is 10.2 per cent; next-best RBC came in at 8.8 per cent. These dividend growth numbers can be found if using the dividend view available on the Globe and Mail’s online Watchlist feature. If you’re a bank watcher, a Big Six watchlist is a great way to slice and dice the sector on a day-by-day basis.

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Dividend growth is a sign of strength in stock and a fabulous hedge against inflation, which most recently came in at 2.2 per cent on a year over year basis. But as TD shows, you may have to make some compromises if you invest in a dividend growth leader. TD’s yield is the lowest of the Big Six, and its five-year returns suggest its less of a bargain than the other five.

TD’s appeal will depend a lot on your investment goals.

A long-term investor seeking total returns built on dividends and share price appreciation could make the case that TD’s dividend growth will continue to support strong share price gains. An income investor might gravitate to CIBC, with its 4.7 per cent yield. But CIBC has grown its dividend at less than half the rate of TD in recent years. A long-term investor could reasonably look ahead to TD producing more dividend income over the long term if it keeps up its leadership in increasing its cash payouts to investors.

There’s an old strategy in Canadian investing that says the bank with the weakest share price growth and highest dividend yield is attractive because of the rebound potential. TD is just the opposite. You’re buying the strongest bank as measured by dividend growth and share price growth in the expectation that this sector-leading strength is sustainable.

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