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A Cheap Banking Sector Stock With a 5% Dividend Yield for Your TFSA Portfolio Today

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The Canadian banks often come up as top picks for investors searching for reliable dividend payers for their self-directed TFSA.

Let’s take a look at Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) to see if it deserves to be on your buy list.

Oversold?

Bank of Nova Scotia currently trades at $70 per share compared to $84 in late 2017. The drop is partly due to a general pullback in the financial sector, but Bank of Nova Scotia also has some company-specific reasons investors might be sitting on the sidelines.

The bank made three large acquisitions last year, and the market might be waiting to see if integration goes well and the assets deliver the expected returns. Two deals occurred in the Canadian wealth management space, and Bank of Nova Scotia also doubled its market share in Chile through the purchase of a majority stake in BBVA Chile.

Bank of Nova Scotia missed analysts’ expectations when it reported fiscal Q2 2019 earnings, but the numbers were still solid. The bank generated $2.263 billion in adjusted net income, representing a 3% gain over the same quarter last year.

The international operations, primarily located in Latin America, had a strong quarter on a year-over-year basis. Adjusted net income from the international group rose 15% to $787 million. As the middle class grows in the region, Bank of Nova Scotia should benefit.

The board raised the dividend earlier in the year. The current quarterly payout of $0.87 per share provides a yield of 5%.

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Risks

Canadians currently owe roughly $1.80 for every $1 of disposable income, which has some pundits concerned that rising interest rates or higher unemployment could trigger a wave of defaults on mortgages and other loans.

A shock would certainly prove negative for the banks, but a housing crash is unlikely. Mortgage rates are falling and the unemployment rate is at its lowest level in decades.

Bank of Nova Scotia is well capitalized with a CET1 ratio of 11%, so the bank can ride out a rough spell.

Should you buy?

Bank of Nova Scotia trades at a cheap 10.5 times trailing earnings. A downturn in the global economy could push the share price lower, but buy-and-hold investors might want to start nibbling on the stock right now. You get paid a great yield to wait for better days and the dividend should continue to increase at a steady pace.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.

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