Banks provide a necessary service to customers, from those who simply have bank accounts to those who borrow money. Financial uncertainty, as the United States is facing today, can affect a bank's business, but strong banks will generally muddle through even the most difficult periods.
If you are a dividend investor, the relatively high yields on offer from banks will likely be attractive to you. You'll want to choose wisely, however, with Citigroup(NYSE: C) providing an interesting example of why.
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Better than the average yield
The average bank in the U.S. has a yield of around 2.6%. Citigroup's dividend yield is a far more attractive 3.5%. The dividend backing that yield has been increased regularly, though not annually, since 2015. That's not a bad story, and Citigroup is one of the best-known banks in the U.S. market.
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The first quarter of 2025 was pretty good for Citigroup, despite the uncertainty that has been lingering thanks to geopolitical issues. The bank's revenue rose 3% versus the same quarter of 2024. Operating costs were lower by around 5%, and earnings per share were up a huge 24%, helped along by stock buybacks. It looks like Citigroup is holding up fairly well this time -- which is the real issue with Citigroup when it comes to buying it for its dividend.
During the Great Recession, Citigroup floundered badly. Some of the particulars include having to take a government bailout and the reduction of the dividend to a mere token penny per share per quarter. The magnitude of the dividend cut can't be overstated, since prior to the financial turmoil the dividend was as high as $5.40 per share per quarter. There were actually multiple cuts over a roughly two-year period before the dividend settled at a penny.
Citigroup is in better financial shape today than it was back then, but investors looking for a reliable bank should see the Great Recession as a cautionary tale. Citigroup basically failed a very real stress test. There's a better option available, and it has an even higher yield of roughly 4.9%.
Holding strong in the face of adversity
Citigroup's share price has fallen around 10% so far in 2025. The share price of Canadian banking giant Toronto-Dominion Bank(NYSE: TD) is up nearly 15%. As noted, it has a 4.9% dividend yield. Here's the interesting thing: TD Bank, as the company is more commonly known, is facing some headwinds today. Despite the problems, it just raised its dividend by 3%. And during the Great Recession, TD Bank didn't have to resort to cutting its dividend.
The big problem for TD Bank right now is really a self-inflicted wound. It allowed its U.S. business to be used for money laundering. U.S. regulators were not pleased and hit the bank with a fine. They're demanding upgrades to the company's money laundering controls, and have placed the U.S. business under an asset cap. The asset cap basically means TD Bank can't grow in the United States until it has appeased regulators.
TD Bank hails from Canada, where it is one of the country's largest financial companies. Canada's banking industry is highly regulated, so its largest banks have entrenched positions. That means TD Bank's core is still very strong and not directly affected by the U.S. asset cap. However, the U.S. market was expected to be TD Bank's big growth driver. So TD Bank is likely to be a slow grower for a few years.
Given TD Bank's history of resilience, and the fact that it increased the dividend despite the current headwinds, this is a low-risk turnaround play. While waiting for that turnaround to unfold, investors can collect a well-above-average yield, which is ample compensation. But what's interesting is that the steps TD Bank has to take in the U.S. market to appease regulators are likely to make it more resilient to any problems that might arise from the current geopolitical uncertainty. Specifically, the bank is strengthening the balance sheet of its U.S. business so it can continue to serve its customers without issue.
TD Bank has a better risk/reward balance than Citigroup
There's nothing inherently wrong with Citigroup right now. But if you are a dividend investor, you can do better with higher-yielding TD Bank. While TD Bank has some warts, the negatives may actually help it better weather the headwinds currently buffeting the financial markets. The best part? High-yield TD Bank's stock can be bought for well less than $100 a share.
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Citigroup is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
