The Motley Fool

Income Investors: A Top Canadian Dividend Stock Yielding 5% for Your TFSA

Image source: Getty Images

The TFSA is a handy tool for investors who want to generate steady income from reliable dividend stocks and not have to pay any tax to the Canada Revenue Agency on the distributions.

The TFSA cumulative limit is now as high as $69,500 per person. That’s adequate space to build a diversified dividend fund that can create a stream of tax-free earnings to complement existing pension income.

Let’s take a look at one dividend stock that appears oversold and might be an interesting pick today.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) might be Canada’s third-largest bank, but it certainly isn’t small. In fact, the company has a market capitalization of $84 billion and employs 100,000 people serving 25 million customers.

The bank exited more than 20 non-core countries in the past couple of years, refocusing efforts on Canada, the United states, and Latin America.

The best growth opportunities arguably lie in the Pacific Alliance markets of Mexico, Peru, Chile, and Colombia. Bank of Nova Scotia has invested billions of dollars on acquisitions in the region and more deals should be on the way. The Pacific Alliance countries are home to more than 225 million people. Banking penetration is less than 50%, so there is significant potential to grow revenue and earnings as the middle class expands and demand rises for loans and investment products.

On the commercial side, Bank of Nova Scotia’s presence in each of the four Pacific Alliance countries gives it a leg up for securing business with companies that are taking advantage of the trade bloc’s benefits. Labour, goods, and capital can move freely and businesses that expand to the other countries need a wide array of cash management services.

At home, Bank of Nova Scotia made two large wealth management acquisitions in 2018 that added more than $85 billion in assets under management. In fiscal Q1 2020, the bank created a new global wealth division that holds the new businesses as well as the wealth management operations that previously sat under the Canadian banking group.

A string of deals in the wealth management sector occurred in Canada in the past few years, as the big banks search for high-margin business to help offset declining net interest margins due to falling interest rates.


Recent rate cuts by the United States and Canada could put further pressure on margins. However, lower rates should drive additional borrowing for home purchases and business investment. At the same time, reduced rates help existing borrowers get through tough times. In the event we see a meaningful economic slump, the default impact should be mitigated by the Bank of Canada’s latest rate move.

Should you buy?

Bank of Nova Scotia trades at just $69 per share, or roughly 10 times trailing earnings. That is getting quite cheap given the company’s strong profitability and long-term growth potential.

Additional downside could be on the way in the near term, as volatility connected to daily news on the coronavirus spread shifts market sentiment. I wouldn’t back up the truck, but investors might want to start nibbling on the stock. You get paid a solid 5.2% yield and can look to add to the position if the price dips meaningfully lower.

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!

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.

The Motley Fool recommends BANK OF NOVA SCOTIA. Fool contributor Andrew Walker has no position in any stock mentioned.

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.