The Motley Fool

Bank of Nova Scotia: A High-Quality Dividend Growth Stock at a Reasonable Price

If you’re building an income-growth machine, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is as high quality and predictable as it gets. Its long history goes back to 1833, when the bank paid its first dividend on July 1. It has continued paying out dividends since. Even in the face of the financial crisis, it didn’t cut its dividends, but it did freeze them in 2009 and 2010.

Earn a 4.3% growing yield from this solid Canadian bank

Bank of Nova Scotia is the third largest bank in Canada, and operates in four segments: Canadian banking, international banking, global wealth and insurance, and global banking and markets. It is diversified internationally, providing financial services in over 55 countries.

It has dropped from its 52-week high of $75 to its current price of $63, a dip of 16%. Thanks to the pullback, investors can now add this core holding to their portfolio at what I think is a fair price with a starting annual income of 4.3%, paid out in quarterly dividends.

What’s more, since 2011, it has continued to increase its dividends. From 2012 to the present, it has shown a pattern of increasing dividends every half year. To be exact, from 2010 to 2014, its annual payout went from $1.96 per share to $2.56 per share, which equates to an annual growth of 6.9%. That’s more than twice the rate of inflation.

Its dividend is believed to be safe and can grow as its payout ratio is only approaching 46%. Today’s starting yield of 4.3% is at the high end of its five-year historical yield range. For comparison, the low end is at 3.5%.

Short-term risks
The TSX is near its all-time high. Any catalyst may cause the market, along with shares of Bank of Nova Scotia, to drop in price. For example, an increase in the interest rate could cause a drop in dividend stocks. Why? Many people think stocks are risky and may sell their dividend stocks for a guaranteed investment certificate once the interest rate is increased to an acceptable rate.

Another downside factor is that it’s possible that the Bank of Nova Scotia’s price could fall further once the effects of the low oil prices are reflected in its earnings. The Canadian housing market is also a looming concern. However, if you’re investing for the long-term, Bank of Nova Scotia is a strong candidate to consider.

What can investors expect in the future?
Analysts estimate a one-year target price of $69 to $71. If you do end up adding Bank of Nova Scotia shares to your portfolio at $63, from capital appreciation alone, you’re estimated to get a return of 9.5% to 12.7% in one year. Adding in the 4.3% yield, that’s a total return of 13.8% to 17%.

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Fool contributor Kay Ng owns shares of Bank of Nova Scotia.

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