Many investors choose Canadian bank stocks because of their history of terrific dividends. In fact, Canada’s top banks have all paid consistent dividends for at least a century.
Personally, my favourite name in the sector is Bank of Nova Scotia (TSX:BNS)(NYSE:BNS). I like the bank’s domestic operations, including its mortgage business, its credit card subsidiary, and even its wealth management operations. Demographics should ensure plenty of earnings from wealth management, as baby boomers continue to age. These folks will need help with their investments.
The part of the business I’m most excited about is the exposure to Latin America. Approximately one-third of Scotiabank’s earnings come from operations in nations like Mexico, Peru, Colombia, and Chile. These economies are growing faster than Canada and also offer better net interest margins. These places also offer better population growth and potential to make acquisitions to solidify market share.
Bank of Nova Scotia also offers investors one of the best dividends in the entire Canadian banking sector. The current yield is 4.8%, and the company looks to pay approximately half of its earnings back to shareholders. This conservative payout ratio greatly protects folks from a dreaded dividend cut.
To put the dividend into perspective, a $10,000 investment in Scotiabank shares pays just over $481 per year in dividends. That’s a solid start, but it’s hardly enough to get anyone excited. The really interesting part of an investment in a stock like this one is the potential it has in the future. Let’s take a closer look at how much you could possibly be earning 20, 30, or 40 years from now.
The power of compounding
Over the last decade, Bank of Nova Scotia has been a dividend-growth machine. In 2010, it paid $1.96 per share in dividends. By 2019, after raising the payout each year, the dividend totaled $3.49 per share. That’s a compound annual growth rate of right around 6%.
Nobody can predict the future, of course, but I think it’s pretty reasonable to expect Scotiabank to raise its dividend that quickly going forward. I wouldn’t be as confident if the payout were going up 20% a year, but 6% is a very reasonable goal. In fact, I wouldn’t be surprised if the company is able to beat that target.
Remember, a $10,000 investment in Scotiabank would generate dividends of $481 annually today. After 20 years of 6% annual growth, that $10,000 original investment would be generating annual dividends of $1,542. That’s right; after just two decades, you’d have a yield on cost of more than 15%.
Results get even better if you hold Bank of Nova Scotia shares for 30 years. Assuming 6% dividend growth, you’d be looking at a total annual income of $2,762 on a $10,000 investment. That’s a yield on cost of 27.6%.
And finally, after 40 years, your $10,000 original investment would generate a whopping $4,947 in annual dividends. Sure, inflation will ensure that’s not worth as much as it is now, but it’s still a pretty good reward for doing nothing for four decades.
Remember, even after collecting all those dividends, you’ll still own your original position in Scotiabank shares. Even if we assume they only go up 5% per year — which gives us a very reasonable total return of around 10% per year — it still translates into an impressive result.
Your $10,000 original investment at a 5% annual return would turn into something worth $70,399 after four decades of slow and steady growth. And remember, it would be churning out an annual income of nearly $5,000. What a wonderful investment.
Now think about how good your retirement would look if you had a portfolio stuffed with a couple dozen stocks, just like this one.
The bottom line
A mere $10,000 invested in an excellent stock like Bank of Nova Scotia can really pay dividends down the road. There’s no guarantee it’ll work, of course, but considering the company’s history and its solid position among the largest banks in the country, I like its chances.
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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 Nelson Smith owns shares of BANK OF NOVA SCOTIA. The Motley Fool recommends BANK OF NOVA SCOTIA.