Bank of Nova Scotia (TSX: BNS) and Algonquin Power & Utilities (TSX: AQN) are among the worst-performing stocks in their respective sectors. Is it time to buy them?
In the last 20 years, BNS stock’s annualized returns were satisfyingly at 8.4%, despite the latest selloff. The dividends it paid out every quarter made up more than half of those returns! Similarly, in the last 10 years, Algonquin stock delivered annualized returns of 11.6%, despite the shares substantially sold off recently. In the last decade, its dividends contributed close to half of its total returns.
It goes to show that it’s a good strategy to buy them when they have tempting yields.
Buy some dividend stocks for big income
It’s certainly not a bad idea to buy some BNS stock and AQN shares now. After declining approximately 29% and 23%, respectively, year to date, the large-cap stocks now offer temptingly high yields of 6.4% and 7.1%.
Bank of Nova Scotia stock has paid dividends since 1833. Many retired or income investors hold it for passive income, as the big Canadian bank has paid safe dividends, even during the worst of times in economic cycles. At about $64 per share at writing, it trades at about 7.6 times earnings, which is close to the levels in the past two recessions.
In today’s economy, we’re experiencing rising inflation and interest rates. This is leading to lower consumer spending and business investment. The U.S. is already in a recession, and Canada is soon to follow. RBC published on October 12 that it now expects a recession to hit Canada as soon as the first quarter of 2023.
Algonquin is a diversified utility that’s primarily regulated. It also has about 20% of its portfolio in renewable power from wind, solar, hydro, and thermal energy. Its renewable portfolio are supported predominantly by long-term contracts. AQN stock is a Canadian Dividend Aristocrat with a 10-year dividend-growth rate of 9.5%.
If you already own the declining stocks, you should at least hold them to collect dividend income, if not add more at these cheap levels.
The Foolish investor takeaway
The worst-performing stocks could be the winners of tomorrow. So, if you hold the (temporary) losers, it’s not time to give up, especially since they offer amazing dividend income. These dividend stocks provide a big chunk of their long-term returns from their dividends. You’ve got to hold the shares to receive dividends.
As we saw, because of the recent selloff, their dividends made up close to half of their total returns in the long run. Should we see a recovery of their stock prices over the next three to five years, price gains would make up a larger percentage of their total returns.
Because the Bank of Canada is still increasing interest rates and we’re entering a recession, stock prices can fall lower. So, don’t go all out; opt to build your positions over time.
If you’re already a BNS or AQN stockholder, it may be wise to diversify into higher-quality stocks that are holding up better, as many better-performing stocks are also selling off. For example, you might look into Royal Bank of Canada and Fortis.
