It wouldn’t be a stretch to say that bank stocks are among the default choices for most Canadian dividend investors. They offer financially sustainable dividends with healthy yields. Since all the Big Six bank stocks are Aristocrats, the dividends also manage to keep pace with inflation, making them ideal from an income-generation perspective.
Even though the banks offer good yields in any given market, the numbers become far more attractive when the sector is bearish, like it is right now. As one of the most heavily discounted bank stocks, Bank of Nova Scotia (TSX:BNS) is offering a mouthwatering yield of 6.6% that can make you smile.
The bank stock
As the third-largest bank in Canada and Peru (by loans) and the third-largest private bank in Chile, it has a dominant position in multiple markets. Its international presence allows it more room to grow and partially shields it from local headwinds.
About 38% of its earnings come from international markets. Apart from conventional banking, wealth management is one of the most significant income generation segments for the bank.
The stock hasn’t performed well in the last five years, but if we stretch back further, the performance is palatable, though not comparable to the top growers in the sector. Despite multiple slumps, the stock managed to achieve modest growth in the decade preceding the pandemic.
Its recovery-fueled growth after the 2020 fall was quite decent, though still on the lower side compared to the other constituents of the banking sector.
However, the subsequent correction was one of the most brutal in the stock, and as a consequence, the bank is currently trading at a 31% discount from its last peak. This has been the primary force behind the elevated yield and is also the reason the bank is among the most undervalued stocks in the banking sector.
The dividends
The yield is certainly quite attractive, especially for a Dividend Aristocrat. If you can divert about $30,000 to this bank stock, you can start generating a decent $165 monthly dividend income. Despite being an underperformer, the bank shares most of the characteristic strengths of the Canadian banking sector, which includes the financial sustainability of the dividends.
The payout ratio is currently 60%, which may seem on the higher side for a bank stock, but it doesn’t seem high enough to financially strain the bank enough to force it to suspend or slash its payouts. It has already paced its dividend-growth rate, which is more in line with the financial reality of the market, though it may change when the economy fully recovers.
Foolish takeaway
The bank stocks are currently in a bearish phase, but it’s difficult to predict how long this bearish phase may last. If it’s destined to slip down further, you may be better off waiting to lock in an even more attractive yield. However, if a recovery is on the horizon, buying now and locking in the current yield may be the smart thing to do.
