Is BNS Stock a Buy in December 2022?

Bank of Nova Scotia (TSX:BNS) stock yields about 6.3%! It’s generally a buy for income investors who have the risk tolerance.

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Dividend stocks like Bank of Nova Scotia (TSX:BNS) are one of the best ways to invest your money in Canada. The big bank pays out eligible dividends that are favourably taxed in non-registered accounts. Canadians should take advantage of the opportunity to increase their favourably taxed income.

Interest income, including from Guaranteed Investment Certificates (GICs) and bonds, earned in your non-registered accounts are taxed like your job’s income — at your marginal tax rate. So, let’s say you’re a B.C. resident earning $120,100 a year. Your marginal tax rate would be 40.70%. Any additional interest income you earn up till $155,625 this year would be taxed at that rate. However, if you instead received additional income from eligible Canadian dividends, the tax rate on those dividends would only be 18.88%.

No matter which tax bracket you’re at, eligible Canadian dividends are typically taxed at a lower rate. Therefore, you should highly consider buying dividend stocks like BNS stock when they trade at attractive valuations. Currently, one-year GICs offer a risk-free return of +5%. You can get higher passive income — a juicy yield of about 6.3% — from BNS stock. But what’s the catch?

What’s pressuring BNS stock?

Year to date, BNS stock has lost about 27% of its value.

BNS stock is a riskier investment than GICs that offer principal protection. You can expect to get more from the bank stock in terms of risk and return: volatility, bigger income, and potentially higher returns.

Theoretically, stocks can go to zero, meaning you can lose your entire investment. However, there’s a very low chance of that happening for the big Canadian bank stock, which is sufficiently capitalized and has an A+ S&P credit rating.

Michael Sprung from Sprung investment management summed up the bank stock on BNN recently:

“It has underperformed the other banks. There is some concern over the international part of the business and large exposure to South America. Its sensitivity to changing interest rates is a little slow compared to others. Also there have been significant changes in management including the CEO who is from Finning, although he has been a director of BNS for a period of time. It is an excellent buy at these levels and has a 6% yield so wait for a recovery.”

To elaborate, emerging markets like South America are riskier geographies to invest in. Slower sensitivity to changing interest rates prevents the bank from capitalizing on higher net interest margins — at least not as high as the industry average. The chief executive officer change creates some uncertainty as well.

Is BNS stock a buy in December 2022?

From a valuation standpoint, Bank of Nova Scotia stock is cheap. At $65.50 per share at writing, it trades at below eight times earnings. This is a substantial discount of 32% from its long-term normal valuation.

You’ll notice that from the analyst consensus 12-month price target of $78.58, the TSX stock trades at a discount of only 16%. That’s because the macro environment is gloomy with high inflation, rising interest rates, and an expected recession to occur next year.

So, it’s critical for investors to have a long-term investment horizon of at least three to five years to improve their chances of getting solid returns from BNS stock. It is also a good passive-income idea, as it pays handsomely for your patience.

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 Kay Ng has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

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