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The Best Canadian Bank Stocks to Buy for Your TFSA

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Written by Kay Ng at The Motley Fool Canada

Big Canadian bank stocks serve as core holdings for diversified stock portfolios. The blue-chip stocks have dipped in the last little while from multiple U.S. regional bank failures. Specifically, BMO Equal Weight Banks Index ETF, which consists of roughly an equal weight in the Big Six Canadian bank stocks, is down about 11% from its peak in February.

Some Canadian bank stocks have corrected more severely than others. Regardless, for long-term investors, it’s an opportunity to consider buying shares on sale in their Tax-Free Savings Account (TFSA) for tax-free returns. Let’s explore the top Canadian bank stocks to buy for your TFSA today.

RY Chart
RY Chart

Big Six Canadian bank stock data by YCharts

The best Canadian bank stocks for income

Interestingly, from the peak in February, Canadian Imperial Bank of Commerce has fallen only about 7.5%, taking the second place in terms of resiliency from the recent dip. It also offers the second-highest dividend yield among the group. At about $57 per share at writing, it yields almost 6%.


Bank of Nova Scotia stock’s decline of about 10.6% from the February peak is sort of in the middle of the pack. At $65.81 per share at writing, the stock offers the highest dividend yield of almost 6.3%.

They offer the largest amount of passive income for investors who prioritize current income. It would take time for the others’ income to catch up to their high yields. Moreover, interest rates may be rising too much too quickly that a recession might be triggered. During a recession, the regulator, the Office of the Superintendent of Financial Institutions, is likely to restrict the banks from raising their dividends.

Well, at least the Bank of Canada kept the policy interest rate the same at 4.50% this month, unlike the Federal Reserve, which recently continued with a rate hike of 0.25%, setting the Federal Reserve interest rate at 4.50% to 4.75%. This is also why the U.S. dollar gained strength against the Canadian dollar.

The safest Canadian bank stocks

In today’s environment, as the price action implied, the safest Canadian bank stock is National Bank of Canada, because it has the least exposure to the United States. Close to 80% of the bank’s revenues are generated in Canada.

Royal Bank of Canada (TSX:RY) stock has also been resilient, likely because of the diversity of its business. It has five business units: personal and commercial banking (40% of fiscal 2022 revenue), wealth management (30%), capital markets (18%), insurance (7%), and investor and treasury services (4%). It generates about 59% of its revenues from Canada, 25% from the U.S., and 16% internationally.

The best Canadian bank stock for the highest total return

Toronto-Dominion Bank (TSX:TD) stock has been hit the hardest — down 16% from the February peak. One reason is that it owns 10% of Charles Schwab, which has lost about 29% of its value in the last three weeks. Consequently, once this banking crisis resolves, TD stock should make the strongest comeback and deliver the highest returns over the next five years.

Assuming a conservative earnings-per-share growth rate of 7% and a reversion to the mean valuation — a price-to-earnings ratio of about 11.7 — TD stock can deliver annualized returns of about 15% over the next five years.

Investors can choose the Canadian bank stocks to invest in for their TFSAs depending on if they seek current income, stock price resilience (i.e., safety of capital), or the highest total-return potential. If you can’t choose, you can buy them all via the ZEB ETF for long-term investing.

The post The Best Canadian Bank Stocks to Buy for Your TFSA appeared first on The Motley Fool Canada.

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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Kay Ng has positions in Toronto-Dominion Bank and Bank of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia and Charles Schwab. The Motley Fool has a disclosure policy.