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Bank of Nova Scotia Rises 16%: What Should You Do With it?

The good thing about investing is that you don’t have to catch the bottom to book solid gains. I bought some shares of Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) at about $56 per share. Comparatively, the company’s 52-week low is $51 per share, about 9% lower than what I paid.

At about $65 per share, the bank is about 16% higher from my cost basis. What should I do with my gains?

My position

Being a value-dividend investor, I’m naturally focused on Bank of Nova Scotia’s dividend; specifically, I want to know if it can continue to increase and if its shares are overpriced.

In the second quarter, Bank of Nova Scotia hiked its dividend per share by almost 2.9%. As a result, my yield on cost is 5.1%. However, investing is a forward-looking activity. Right now the shares yield only 4.4%.

As I mentioned before, my shares have appreciated 16%, which is an excellent result for the duration of five months.

Bank of Nova Scotia’s strength

Since 2000, Bank of Nova Scotia has delivered average annual returns of 11.5%. This is what happens when you invest in an A-grade, quality company that shares profits with its shareholders via a strong, growing dividend.

From 2000 to 2015, its dividend has grown at a compound annual growth rate of 12%. More recently, from 2010 to 2015, its dividend grew 6.8% on average per year.

Based on the company’s annual payout of $2.88 per share, its payout ratio is about 50%. With earnings expected to grow 5-7% per year in the medium term, the bank should be able to keep growing its dividend at least by 5% per year.

Valuation

For strong dividend growers, the dividend yield is one source that indicates whether the company is priced at a good valuation or not.

Surprisingly, other than the anomaly of yielding over 5% at the start of the year, in the last five years 4.4% is considered a high yield for the bank.

Is the bank still a bargain today?

Its long-term, normal multiple is 12.4 while it currently trades at a multiple of about 11.2. So, the company is actually discounted by about 10%.

Conclusion

There are three things I could do: buy, hold, or sell. Technically, the bank is near overbought territory, so it’s not the best time to buy. However, as mentioned earlier, it’s discounted by 10%.

Since I bought at a historically high yield of over 5% and there’s a margin of safety for my original capital as the shares have risen 16%, I’m likely to continue holding the quality shares for a growing dividend.

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Fool contributor Kay Ng owns shares of Bank of Nova Scotia (USA).

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