When considering dividend heavyweights, Toronto-Dominion Bank (TSX:TD) certainly comes out near the top of the list. Yet, at this moment, Bank of Montreal (TSX:BMO) seems to hold the upper hand while TD stock grapples with challenges that make it look risky. So, let's look at what's going on with both stocks and why BMO stock might come out above TD stock.

TD stock

TD stock's regulatory troubles in the United States have taken centre stage in recent months. The bank agreed to a massive US$3 billion penalty for failing to comply with anti-money laundering (AML) standards. This penalty came alongside the imposition of an asset cap by U.S. regulators, limiting TD stock's ability to grow its operations south of the border. For a bank that has leaned heavily into U.S. expansion in recent years, this is a significant setback. Not only does it hinder growth, but it also tarnishes TD's reputation, adding an extra layer of complexity for investors.

The financial impact of these issues was evident in TD's recent earnings. In the fourth quarter, TD stock reported adjusted net income of $3.21 billion, down from $3.49 billion in the same period last year. The bank's U.S. retail segment, which has been a cornerstone of its growth strategy, saw profits drop a staggering 34% over the fiscal year.

Adding to the uncertainty, TD stock suspended its medium-term growth targets. New chief executive officer Ray Chun has announced a comprehensive review of the bank's operations, with a particular focus on risk management and compliance frameworks. While these steps are prudent and necessary, they also signal that the road to recovery may be long and arduous. Investors are left wondering how these changes will play out and whether TD can regain its footing in the U.S. market.

BMO stock

BMO is proving to be a more stable and reliable option, even amid its own challenges. BMO's fourth-quarter results showed a dip in net income due to increased provisions for potential loan losses, particularly in the United States. However, the Canadian personal and commercial banking segment remained relatively stable, demonstrating the bank's ability to balance its operations effectively across different geographies and business lines.

What sets BMO apart is its diversified approach and focus on high-value segments. The bank has been targeting mass affluent and high-net-worth clients in its wealth management business. This continues to be a growth driver. Its capital markets division, while not immune to volatility, also contributes significantly to its overall performance. This balanced approach helps BMO weather economic headwinds more effectively than some of its peers.

BMO's future outlook is bolstered by its proactive risk management strategies. While the bank has increased provisions for credit losses, this move reflects a forward-thinking approach to potential economic challenges. By preparing for a possible uptick in loan defaults, BMO positions itself to absorb shocks without severely impacting its financial health. This strategic foresight contrasts with TD stock's current reactive stance as it scrambles to address regulatory penalties and operational reviews.

Bottom line

Dividend investors, in particular, will find BMO's payout ratio and dividend yield appealing. BMO's forward annual dividend yield of 4.62% is well-supported by its earnings, with a payout ratio of just under 70%. This provides a solid balance between rewarding shareholders and retaining enough capital for future growth. In comparison, TD stock's payout ratio of 93% raises concerns about sustainability, especially given its reduced earnings and looming regulatory costs.

So, while both TD stock and BMO have storied histories and strong market positions, the scales currently tip in favour of BMO. Its diversified operations, forward-thinking risk management, and stable dividend make it the most compelling choice for investors. TD stock, however, faces a challenging recovery as it deals with regulatory setbacks and operational reviews. For now, BMO seems to offer the steadier, more promising path forward for dividend investors.