The best high-yielding bank stocks to invest $1,000 in right now

After the Great Recession, when US banks were struggling, Warren Buffett stepped in to invest in the Bank of America. It was a contrarian play as the iconic US bank was struggling badly at the time. Buffett is making profits now that Bank of America has recovered. A similar contrarian opportunity exists today with Toronto-Dominion Bank (T.D -0.90%).

If you have $1,000 to invest that you don’t need to pay your monthly bills, maintain an emergency fund, or pay down short-term debt, you should consider allocating it to shares of this bank’s stock. Here’s why.

The ugly story from TD Bank

Receiving the bad news immediately, Toronto-Dominion Bank, usually just TD Bank, ran afoul of US banking authorities. The circumstances were also bad because it doesn’t look good when your bank is being used by money launderers. TD Bank had to revamp its money-laundering controls and will pay a fine of about $3 billion for its past actions.

Image source: Getty Images.

However, the truly worrying consequence of this unfortunate period is that TD Bank’s US business will be subject to an asset cap. That basically means it can’t grow its US operations without approval from US regulators. That approval likely won’t be given until TD Bank regains the trust of regulators. Expansion into the United States has been TD Bank’s big growth initiative, so it will likely go through an extended period of lagging behind. his bank colleagues.

And next year will be a time when US business performance looks pretty weak. This is because TD Bank needs to rework its balance sheet to free up capacity to serve its customers. The company is already warning that this will hurt its earnings.

That’s what investors are buying when they buy TD Bank today. But with 5.2% dividend yieldinvestors are fairly well compensated for the risk. Note that the average bank dividend, using SPDR S&P Bank ETF (NYSEMKT:KBE) as a proxy, it’s yielding just 2.5% today (less than half!).

TD Bank’s problem may not be as bad as it seems

To be fair, TD Bank is likely to be a while behind the industry as its main growth engine has stalled. However, the US business is only one part of a much larger company. Indeed, TD Bank is still the second largest bank, by deposits, in Canada. And its Canadian operations are unaffected by the U.S. unrest. It also runs a substantial capital markets business. The bench won’t hit on all cylinders, but the car hasn’t stalled completely.

Meanwhile, the big fine is already paid. TD Bank has a sizeable stake in Charles Schwab. He recently sold about $2.6 billion worth of his position, which is unlikely to be a coincidence (he’s already put aside the other $400 million or so). In other words, the financial hit to the company is actually quite minor when you look at day-to-day operations. Yes, ongoing costs will likely be higher due to improved controls, but this is a manageable change.

So, from a long-term perspective, TD Bank seems very likely to survive this difficult period and ultimately turn its business around. That shouldn’t come as a shock to a bank that has paid a dividend every year since 1857. And with the big fine already covered, there’s probably little reason to worry about a dividend cut. So you’re basically getting paid very well to go through a period of average performance.

TD Bank is worth the risk

Is there more uncertainty in owning TD Bank compared to other banks? Probable. But the risk seems relatively low, and over time the company will do whatever it takes to win back the trust of regulators and Wall Street. When that happens, the valuation gap between TD Bank and the rest of the banking industry should close.

If you don’t mind collecting a fat return between now and then, you can compound your investment with reinvestment of dividendsTD Bank is a low-risk turnaround story you’ll want to watch right now. It might just be the best high-yielding bank stock you can buy, whether you have $1,000 or $100,000 to put to work.