Gone are the days in which you have to save up a meaningful amount to make the trading commission worthwhile before you can invest. With commission-free trading platforms offered by National Bank or Wealthsimple, you can invest as little as you want at any time. However, you don’t want to invest too small an amount, because the sooner you start saving and investing regularly for solid long-term returns, the sooner you can build wealth or even a second income.
If your focus is on building a second income, you’re in luck. Because of a relatively high inflation, the Bank of Canada increased the policy interest rate last year, which has weighed on stock valuations. As a result, dividend stocks now offer higher yields.
We’ll look at an example with Bank of Nova Scotia (TSX:BNS) today to build a second income. With the other Big Six Canadian banks, Scotiabank holds close to 90% of the country’s banking deposits. A favourable regulation and the oligopoly environment allow the bank to be generally stable and profitable through economic cycles.
The stock has stumbled recently, causing it to drop one place, to being the fourth-largest Canadian bank by market capitalization. It could take some time for the new chief executive officer to steer the ship in the right direction.
Meanwhile, Canadian investors can enjoy a boosted dividend yield of almost 6.1% because of its depressed stock price. The top bank stock for income now trades at a good discount of roughly a third from its long-term normal valuation.
Building a $166 second income from the bank stock
In the past 10 years or so, Bank of Nova Scotia stock delivered a compound annual growth rate (CAGR) of about 8.1%, which roughly matched the market returns. However, today, the bank stock’s income almost double the market’s. Of the 8.1% return, 5% was price appreciation and 3.1% was the return from its dividend payments. In the period, the bank managed to grow its dividend at a CAGR of approximately 6.4%.
Let’s assume that over the next 10 years, you invest $200 a month ($2,400 a year) in BNS stock, and it continues to appreciate 5% per year while hiking its dividend by 6% annually. In 10 years, you’ll earn $166.85 per month ($2,002.15 per year). An investment of $200 a month (instead of a lump sum of $2,400 at the start of each year) could lead to greater returns, because you might get a lower average cost base.
| Year | BNS stock price (5% CAGR) | Contribution | # shares bought | Total shares | Dividend per share (6% CAGR) | Dividend income |
| 2023 | $67.65 | $2,400 | 35.5 | $4.12 | $146.16 | |
| 2024 | $71.03 | $2,400 | 33.8 | 69.3 | $4.37 | $302.49 |
| 2025 | $74.58 | $2,400 | 32.2 | 101.4 | $4.63 | $469.60 |
| 2026 | $78.31 | $2,400 | 30.6 | 132.1 | $4.91 | $648.16 |
| 2027 | $82.23 | $2,400 | 29.2 | 161.3 | $5.20 | $838.86 |
| 2028 | $86.34 | $2,400 | 27.8 | 189.1 | $5.51 | $1,042.45 |
| 2029 | $90.66 | $2,400 | 26.5 | 215.5 | $5.84 | $1,259.71 |
| 2030 | $95.19 | $2,400 | 25.2 | 240.8 | $6.19 | $1,491.49 |
| 2031 | $99.95 | $2,400 | 24.0 | 264.8 | $6.57 | $1,738.65 |
| 2032 | $104.95 | $2,400 | 22.9 | 287.6 | $6.96 | $2,002.15 |
Notably, for illustration purposes, this scenario shows a smooth growth rate of 5%. The real stock price would surely be unpredictable and volatile. All we know is that as the stock price increases over time (from the bank expected to earn greater profits over time), you’d buy a lower number of shares from the same $200/month amount you invest. This is a good reason to start investing early. Remember to keep portfolio diversification in mind as well.
