Temporary setbacks in high-quality stocks often present golden investment opportunities. Toronto-Dominion Bank (TSX:TD), or TD Bank, stock might just fit this narrative, as it navigates short-term turbulence while offering a compelling 5.2% dividend yield. Could this be a buy for dividend-seeking investors? Let's take a closer look.

What's happening with TD Bank?

TD Bank recently faced a record US$3.3 billion fine from U.S. regulators due to anti-money laundering (AML) deficiencies. This penalty not only dented the Canadian bank stock's earnings but also elevated the bank's dividend payout ratio to 92% for 2024 –far above its historical 50% range. Additionally, TD has been forced to restructure its U.S. operations to comply with asset cap restrictions, including a planned 10% reduction in its balance sheet by 2025.

These challenges come at a pivotal time, as Raymond Chun assumes leadership as the new CEO. While the near-term outlook is clouded by regulatory hurdles and restructuring, the bank remains resilient with a strong capital position (CET1 ratio of 12.8%) and nearly $2 trillion in assets.

The dividend appeal

TD Bank stock's current dividend yield of 5.2% is one of the highest in its history, rivaled only by peaks during economic crises like the COVID-19 market crash and the Great Financial Crisis. With a quarterly payout of $1.02 per share, the dividend has proven remarkably stable despite recent setbacks.

For long-term investors, the math is compelling. At a 5.2% yield, even modest annual capital gains of 2% could see investments double in 10 years, with dividends doing the heavy lifting. If the bank successfully addresses its current challenges, this could be a rare chance to lock in an exceptional yield.

Risks and challenges

TD Bank's U.S. retail banking operations, which contributed 29% of total revenue in 2023, are currently constrained by the asset cap, stifling earnings growth potential. Moreover, the partial sale of its Charles Schwab equity stake, necessitated by the AML scandal, will also weigh on future earnings.

That said, TD Bank stock's earnings are well-diversified, with more than 70% coming from non-U.S. segments. Even in a worst-case scenario where U.S. earnings are halved, the dividend remains well-covered by overall profits. However, investors should brace for a potential slowdown in dividend growth.

Why consider buying TD Bank stock now?

TD Bank stock offers a contrarian opportunity. While the AML scandal and regulatory challenges present clear risks, the bank's scale, strong balance sheet, and diversified income streams suggest it can weather the storm.

If TD rebounds under its new leadership and successfully restructures its U.S. business, shareholders could see a multi-year rally, alongside the benefits of locking in a high dividend yield.

Upcoming developments to watch

TD Bank's fourth quarter (Q4 2024) earnings report, scheduled for December 5, could provide critical insights into its recovery strategy and dividend outlook. Investors should monitor the update closely.

Investor takeaway

For income-focused investors, TD Bank stock's 5.2% dividend yield offers an attractive proposition, especially given the stock's historical earnings stability. While the near-term outlook is uncertain, the potential for long-term capital gains, combined with a robust dividend, makes this an intriguing option for contrarian investors.

As general best practice, consider your risk tolerance and the broader economic outlook before making investment decisions.