The Yield on This Canadian Bank Stock Will Make You Smile

Anyone with sufficient risk tolerance and a long investment horizon can benefit from this Canadian bank stock’s juicy dividend.

| More on:
young woman celebrating a victory while working with mobile phone in the office

Image source: Getty Images

Canadians can get yields of up to 5.1% on a one-year Guaranteed Investment Certificate (GIC), which is decent income. You are guaranteed to get your principal back, so in that sense, the income is a risk-free return. However, it is interest income, which is taxed at your marginal tax rate, just like the income you get from your job.

The GIC interest rate has gone up in the last year or so because the Bank of Canada has increased the policy interest rate with the intention to curb inflation, which has gone down to about 4.4% since peaking at 8.1% in June 2022.

If you like the 5.1% GIC, this Canadian bank stock’s yield will make you smile wider. For taking on greater risk and withstanding stock price volatility, investors can buy some Bank of Nova Scotia (TSX:BNS) shares for a juicier yield. This dividend income is taxed at a lower rate than interest income in non-registered accounts. Along with most of its big Canadian bank peers, the bank stock bumped up its quarterly dividend last month. Specifically, it boosted its dividend by about 2.9% so that it now offers a whopping yield of approximately 6.4%.

Observing BNS’s history of dividend yields, we see that it’s at the high end of the range, which can indicate it’s a good buy to lock in a relatively high yield.

BNS Dividend Yield Chart

BNS Dividend Yield data by YCharts

How safe is Bank of Nova Scotia stock’s dividend?

For one, Bank of Nova Scotia has never missed a dividend payment since it declared its first dividend in 1833. That’s about 190 years of continuous dividend payments!

Furthermore, the bank continues to pay out less than its earnings for its dividends, despite higher provisions for credit losses (PCL) in a riskier macro environment. Specifically, its trailing 12-month payout ratio was almost 60% of its net income available to common shareholders.

Additionally, Bank of Nova Scotia has a large reserve of close to $55 billion in its retained earnings that can serve as a buffer for about 10 years of dividend payments if needed. Importantly, there’s no reason to believe that it will need to draw from this reserve to pay dividends, because its payout ratio remains sustainable. That said, it is also true that its payout ratio is normally at or below 50%.

The higher payout ratio suggests heightened risk in investing in the bank stock in the near term and, therefore, the stock has corrected, and its dividend yield pushed higher. This payout ratio is similar to the level it experienced in fiscal 2008/09 around the Global Financial Crisis.

Investor takeaway

The bank just reported its fiscal second-quarter results late last month. It remains well capitalized, as it ended the quarter with a common equity tier-one capital ratio of 12.3%. In addition, fiscal year to date, its PCL on impaired loans was 0.31% of average net loans and acceptances, which is about 40% lower than the percentage in fiscal 2021.

Still, the current market does not like Bank of Nova Scotia’s exposure to greater-risk international markets, which has weighed on the stock price. At $66.50 per share, the bank stock has declined about 21% in the last 12 months. An improvement in the macro environment can allow long-term investors to experience sizeable capital gains. In the meantime, they can enjoy outsized dividend income.

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.

More on Bank Stocks

rising interest rates affect financial stocks
Bank Stocks

What Rising Interest Rates Really Mean for Financial Stocks

With interest rates rising, is it smart to invest in financial stocks?

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Bank Stocks Look Like a Steal: Here’s My Favourite for October 2023

TD Bank (TSX:TD) stock looks dirt cheap, as it continues to fluctuate in this rocky economic environment.

Read more »

bulb idea thinking
Bank Stocks

Striking Gold: Unearthing Canada’s Most Lucrative Stocks

Holding the big Canadian bank stocks is better than holding gold, because the former group produces growing dividend income.

Read more »

data analyze research
Bank Stocks

CIBC vs. Scotiabank: Which Is the Better Buy Today?

CIBC (TSX:CM) and Scotiabank (TSX:BNS) are bank stocks that offer similar value and income, but I’m favouring one in late…

Read more »

Path to retirement
Dividend Stocks

Retirement Wealth: 2 Top Dividend Stocks for TFSA Investors

Parking a sizable portion of your savings in reliable dividend stocks is a time-tested wealth-building strategy appropriate for a wide…

Read more »

Financial technology concept.
Bank Stocks

Canadian Bank Stocks Are Crashing: Should You Buy the Dip?

As bank stocks like Royal Bank of Canada (TSX:RY) are crashing this year, should you go shopping for value plays?

Read more »

calculate and analyze stock
Bank Stocks

Canada’s Financial Powerhouses: Unveiling the Top Bank Stocks

EQB Inc (TSX:EQB) is Canada's top bank stock for growth. Who wins on valuation and profitability?

Read more »

Bank sign on traditional europe building facade
Bank Stocks

You Don’t Have to Pick a Winner in Bank Stocks

Why fret over which bank stock is best when you can easily buy them all?

Read more »