Blue-chip stocks remain popular among investors for several reasons. Typically, these companies enjoy a wide economic moat, allowing them to generate cash flows across market cycles. They also have a strong balance sheet, which helps them through uncertain macroeconomic conditions and deliver consistent profits.
As many blue-chip stocks also pay shareholders dividends, they can also be used to create a passive-income stream and benefit from long-term capital gains. Further, these payouts generally increase each year, driving the effective yield higher by a significant margin over time.
Here are two such steady blue-chip stocks that are part of the banking sector that can help investors earn passive income in 2023. The prospect of an upcoming recession has dragged banking stocks lower in 2022, as demand for loans might reduce, and loan delinquencies are bound to increase.
But a portion of this decline should be offset by a high interest rate environment. Further, falling stock prices have increased dividend yields higher, making them attractive to the income-seeking investor.
Bank of Montreal
Canadian banks are quite conservative compared to their counterparts south of the border. But a highly regulated environment has enabled Bank of Montreal (TSX:BMO) and its Canadian peers to maintain a robust balance sheet. In fact, the common equity tier-one ratio for BMO stands at 15.8%, which is the highest among all banks in North America. The ratio measures a bank’s ability to overcome an economic downturn.
BMO stock is down 17.5% from all-time highs and offers investors a tasty dividend yield of 4.3%. These payouts have increased at an annual rate of 8% in the last 20 years. So, an investment of $10,000 in BMO stock will help investors generate $430 in annual dividends. If these payouts increase by 8% each year for the next two decades, your dividend income will be close to $2,000, increasing your effective yield to 20%.
BMO stock is priced at 9.5 times forward earnings, which is very cheap. Analysts expect its shares to rise by 18% in the next year. After accounting for its dividend, total returns will be closer to 23%.
Bank of Nova Scotia
Another large Canadian bank, Bank of Nova Scotia (TSX:BNS) is a company with a strong foothold in emerging South American markets, such as Mexico, Peru, Columbia, and Chile. These markets are expected to grow at a faster pace than developed economies, including the United States and Canada, which should drive earnings and revenue growth for BNS going forward.
Down 30% from all-time highs, BNS stock offers investors a dividend yield of 6.2%. Further, these payouts have increased by 9.1% annually since November 2022.
While most U.S. banks suspended or reduced dividends during the financial crash of 2008, Bank of Nova Scotia maintained its payout. It has increased dividends in 43 of the last 45 years and began paying dividends back in 1833.
Priced at less than eight times forward sales, BNS stock is trading at a discount, as analysts expect the bottom line to increase by 7.5% year over year in fiscal 2022. Given consensus price target estimates, BNS stock might surge over 30% in the next year.
