The Motley Fool

Why Bank Stocks Should Be a Key Component of Dividend Portfolios

Image source: Getty Images

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) was the first to report its fiscal Q4 and full-year results among the Big Six Canadian banks. The others, Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada will report their results next week.

Scotiabank did fine given that it recently made a number of acquisitions and divestitures with acquisitions requiring integration costs and its divestitures booking a net loss.

Overall, Scotiabank increased revenue by 8.3% to $31 billion with adjusted earnings per share rising marginally by 0.4% to $7.14 for the fiscal year.

Over the longer term, the bank thinks it can achieve +7% earnings-per-share growth with its stable and very profitable Canadian Banking business, its higher-growth International Banking business, a growing Global Wealth Management business, and by reducing operating expenses across its businesses.

Over the last year or so, the bank has closed six acquisitions. Since there are integration costs, once integration completes, its earnings should improve meaningfully.

Glass piggy bank

Bank stocks should be a key part of dividend portfolios

The big Canadian banks have a long history of paying safe dividends. The Big Six Canadian banks’ returns on equity in the last decade have all been at least in the teens, indicating that they are consistently profitable and are therefore excellent core holdings, especially since they pay secure yields of 3.8-5% with payout ratios of roughly 50%, if not lower.

Scotiabank in particular pays a nice dividend yield of 4.8%, which is supported by a payout ratio of about 49%. Canada’s most international bank has long-term growth potential from its international markets, which saw double-digit earnings growth in fiscal 2019. As it builds scale in the high-growth Pacific Alliance countries, it will have opportunities to reduce operating costs.

In any case, the quality Big Six Canadian banks offer passive income that is about 58-108% greater than the current interest rate offered by one-year GICs.

Additionally, the banks’ eligible dividends are more favourably taxed in non-registered accounts. Most importantly, the stocks offer long-term price appreciation, which is not available from GICs. So, long-term investors should certainly consider the big Canadian banks as a key component of their portfolios for growing income and higher total returns.

Portfolio building

Dividend investors should consider the financial sector, including the Canadian big banks, some of the safest banks in the world, for 10-25% of their long-term dividend portfolios.

Utilities, REITs, telecoms, consumer staples, healthcare, and technology are other sectors to consider for safe dividend income and growth. Remember to diversify outside of Canada, which has a limited offering of stocks in consumer staples, healthcare, and technology.

Stay hungry. Stay Foolish.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Kay Ng owns shares of The Bank of Nova Scotia and The Toronto-Dominion Bank. The Motley Fool recommends BANK OF NOVA SCOTIA.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.