1 Magnificent High-Yield Bank Stock Down 30% to Buy and Hold Forever

Citigroup (NYSE: C) has had a great run over the past six months, rising more than 22% over the span. That's a much better performance than the S&P 500 (SNPINDEX: ^GSPC), which has basically gone nowhere in that time. But if you are looking for a bank stock and like dividends, you'll probably prefer the 4.8%-yielding industry giant featured below over Citigroup today. Here's why.

Citigroup isn't that attractive right now

There was probably a time when Citigroup's shares were a bargain, but that time doesn't appear to be now. The stock's performance over the last six months speaks to a company that has clearly been much loved by investors, and that love has had an almost inevitable effect. For starters, the dividend yield is 3%, which is OK on an absolute basis but has to be juxtaposed against the drastic dividend cut that was made following the Great Recession. The dividend isn't anywhere near its pre-cut level, and neither is the stock price.

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Then there's the issue of valuation. Citigroup's price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages. That comes after the stock fell sharply from its recent peaks during the market sell-off. At the worst of the decline, the shares were off by around 20%, roughly twice the drop of the S&P 500 index. The most loved stocks are often the first to be sold during periods of market uncertainty, so Citigroup's dramatic decline isn't really shocking. But it does suggest that investors should tread with caution.

Go for a deeply unloved bank instead

It might be a better idea to look for a bank stock that is so out of favor that even bad news isn't likely to have that big an effect on the shares. If that sounds like a good idea to you, Canadian banking giant Toronto-Dominion Bank (NYSE: TD) and its lofty 4.8% dividend yield is ripe for the picking. There are two important stories here.

First, the bad news. TD Bank, as the bank is more commonly known, got in trouble with U.S. regulators after its U.S. business was used for money laundering. This has resulted in a large fine, the need to overhaul the bank's money laundering controls, and an asset cap. The big one is the asset cap because it, effectively, stops TD Bank's U.S. business from growing until regulators have been satisfied that the money laundering issue is in the past. It will likely take years to achieve this. Unfortunately, TD Bank was hoping that its U.S. business would be its long-term growth engine.

The good news is that this issue only affects the U.S. banking business. TD Bank's Canadian operations and its markets business aren't affected. So the company remains on strong financial ground, and growth won't necessarily stop. It will just hit a bit of near-term turbulence (as the company readjusted to the U.S. asset cap) while the company grows more slowly for a bit. The dividend, which survived the Great Recession, was just increased by 3%. That's a clear message to investors that this bank may be dealing with a headwind, but that it isn't a death blow by any stretch of the imagination.

Data by YCharts.

Investors clearly aren't convinced that TD Bank has the situation under control. The stock is still off by around 30% from its 2022 highs. The 4.8% dividend yield, meanwhile, is near the highest levels in recent history. There's no question that TD Bank is a turnaround story, but it's a very low-risk turnaround. Investors are getting paid very well to stick around while the company works through the problems in its U.S. business.

Unloved and ignored TD Bank is worth the risk

When you look at a bank like Citigroup, which has clearly been favored by investors of late, you have to consider the downside risk involved in buying a stock that looks expensive. TD Bank, on the other hand, is so unloved that it looks like a bargain despite having a still-strong foundation. With market uncertainty high, dividend investors looking for a bank stock will probably be better off with TD Bank over Citigroup if their preferred holding period is forever.

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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.