Canada’s top dividend stocks fell significantly during the initial sell-off in the TSX Index. A rebound over the past two months wiped out many of the best deals, but some leading stocks still offer dividend yields that haven’t been seen since the Great Recession.
Dividend yields of 6-8% on world-class stocks are rare. In fact, anything above 7% is normally reserved for businesses the market thinks will be forced to trim the payout due to cash flow and balance sheet issues.
Leading banks and communications providers traditionally command healthy multiples. In recent weeks, however, the uncertainty surrounding the economic recovery has put pressure on these stocks. Most trade above the March lows, but still appear cheap right now.
Bank of Nova Scotia
Bank of Nova Scotia just reported better-than-expected fiscal Q2 2020 results. The bank earned $1.37 billion in adjusted net income for the three months that ended April 30.
The company continues to maintain a strong capital position with a CET1 ratio of 10.9%.
Provisions for credit losses (PCLs), which indicates loans that might go bad, jumped in the quarter due to the impact from the pandemic lockdowns. Bank of Nova Scotia set aside $670 million for the Canadian banking operations and $1 billion for the international banking group.
The speed and extent of the economic recovery will determine whether the bank sees losses that meet these levels. For the moment, nobody knows how the recovery will evolve.
Bank of Nova Scotia’s dividend should be very safe. The stock jumped 6% on the better-than-expected Q2 results, but still trades at a cheap price and offers a 6.5% dividend yield.
At the time of writing, investors can buy the stock for $55 per share. Bank of Nova Scotia traded at $74 in February.
BCE trades at $55 per share right now and offers a 6% dividend yield.
The company operates world-class wireless and wireline networks across Canada providing mobile, internet, and TV services. BCE also owns a media division that includes sports teams, a television network, specialty channels, and radio stations.
Media companies are struggling with a plunge in advertising revenue as companies reduce expenses to preserve cash flow while their businesses remain closed. In addition, sports leagues are just still trying to figure out how to resume operations.
Despite the media challenges in the near term, BCE remains a steady pick for dividend investors. The wireless and wireline services remain robust and plan upgrades and new streaming subscriptions should help offset some of the weakness in other areas.
BCE’s distribution should be rock solid and you get paid well to wait for the economic recovery to pick up pace.
Is one a better buy?
Bank of Nova Scotia enjoyed a nice bounce on the earnings report. While the stocks still looks cheap over the long haul, there is a risk that the market might be getting ahead of itself given the uncertainties on potential loan defaults once deferrals and government aid measures expire in the coming months.
At this point, I would probably make BCE the first pick and look to add Bank of Nova Scotia on a pullback.