Bank stocks are an appealing option for many investors because they tend to offer appealing dividends as well as solid long-term returns. I say "tend to offer" because not all bank stocks are created equal nor do all bank stocks perform well.
If you're looking for the best bank stock ideas right now, the two picks featured below have real potential. And the second pick might just surprise you.
1. TD Bank: This stock has a proven history of profitability
When it comes to making money with bank stocks , Toronto-Dominion Bank (NYSE: TD) is a prime case study. Over the last 30 years, shares of TD Bank (as it is more commonly known) have posted an incredible total return (including dividends reinvested) of 3,140%. The S&P 500 's total return was 1,340% over the same time period.
What made TD Bank's rise so spectacular? It's partially due to the unique operating conditions of Canada's banking sector, where regulations encourage industry consolidation. For example, TD Bank is currently the second-largest bank in Canada, with $1.4 trillion in assets. The second-largest bank in the U.S. is Bank of America , which has assets of $3.3 billion despite the U.S. banking industry being many times larger than Canada's. Outsized market share has allowed TD Bank to post profits and returns on equity that its U.S. counterparts can't quite match. TD Bank's average annual return on equity over the past five years, for instance, has been roughly 13.2%. Bank of America, for comparison, has averaged just 9.7%.
TD Total Assets (Quarterly) data by YCharts
To be fair, TD Bank's performance in more recent years hasn't matched its historical average. Over the last three years, shares have delivered a total return of just 2% versus a total return for the S&P 500 of 30%. That underperformance is reflective of struggles in the banking sector as a whole. Bank of America shares, for instance, rose by just 0.8% over the same time period. It's also related to some U.S. regulatory issues from 2023 involving the bank's money-laundering controls that TD Bank is working to resolve. Until they are resolved, TD's growth could be somewhat slowed.
Investors could use this underperformance to their advantage. TD Bank currently trades at just 1.4 times book value, a discount versus its three-year average of 1.6 times book value. The dividend yield, too, recently hit new highs and now tops 5%. If you're looking for a bank stock with good value and a solid dividend that is well covered, TD Bank is for you.
2. Berkshire Hathaway: A secret way to bet on the best bank stocks
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) isn't a bank stock, but it owns stakes in enough bank stocks to qualify for consideration. For decades, CEO Warren Buffett has made Berkshire a big investor in a variety of banks. Right now, Berkshire's portfolio is betting tens of billions of dollars on well-known banks like Capital One , Citigroup , and Bank of America, as well as lesser-known banks like Ally Financial and Nu Holdings . In total, Berkshire's portfolio has more than $40 billion invested directly in bank stocks, with another $43 billion bet on financial services companies like Mastercard, American Express, and Visa . Berkshire is more of a bank stock than many realize.
Of course, buying Berkshire shares also exposes you to a wide variety of other businesses, and your direct exposure to banks will be relatively small. But the upside is that you get to outsource your bank stock picks to one of the best investors of all time: Warren Buffett . Buffett has outlined his strategy for investing in bank stocks before.
"It's a business that can be a very good business, when run right," he told investors in 1996. "There's no magic to it. You just have to stay away from doing something foolish." With Buffett managing your bank stock portfolio, you're much less likely to invest in a bank stock bust.
Despite the holding company recently topping $1 trillion in market cap for the first time, Berkshire Hathaway's valuation is highly reasonable, especially considering the quality of the conglomerate. Shares trade just shy of 1.7 times book value, a figure that is likely overstated due to massive share buybacks, which grow shareholder value but tend to depress accounting book value.
It's a strange pick as a bank stock, but Berkshire could be a great fit for those looking to add banking sector exposure while diversifying much of the risk.
Ally is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends Nu Holdings and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy .
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