Do you want to collect passive income? In a way, it’s a silly question.
“Of course I want to collect money for nothing,” you might say. “Who doesn’t?”
But when you really think about it, most passive-income opportunities aren’t “passive” at all. Real estate involves repairs and maintenance. Affiliate marketing requires being active on social media. Selling courses requires that you create a course in the first place. There’s no way around it: collecting passive income takes work. In other words, it isn’t actually passive.
There may be one exception, though: investing. When you invest in a dividend or interest-producing asset, you have no further work to do, save perhaps maintenance research. You do need some money to invest up front, but if you invest in a high-yield asset, you can do quite well.
In this article, I’ll explore a very high-yield bank stock that can give you back more than 6% of your investment every year.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is a Canadian bank stock with a 6.3% dividend yield. A 6.3% yield means you get $6,300 in annual cash back on a $100,000 position. Assuming, that is, the dividend doesn’t change. BNS’s dividend has been changing: it’s been rising, and management aims to keep the dividend hikes going well into the future.
Just this month, the big U.S. banks released their earnings and increased their dividends on blowout results. If Canadian banks’ releases are similar, investors should be well rewarded. Scotiabank already raised its dividend this year; another hike may be coming next year.
Modest payout ratio
Often, when you look at stocks with dividend yields above 6%, you notice that they have high payout ratios. That is, they pay a high percentage of their profit out as dividends, limiting their investment opportunities. That isn’t the case with Bank of Nova Scotia. With a 52% payout ratio, BNS isn’t paying too much of its earnings out as dividends. It will not likely run into issues with dividend sustainability as long as its earnings stay at least flat. However, even achieving 0% growth in earnings has been a challenge for BNS historically.
No growth
One problem BNS faces is that it has no real earnings growth over the last five years. Its net income only grew about 0.03% CAGR in that period, and earnings per share (the number that’s most relevant to shareholders) declined 0.33% CAGR. “CAGR” means compound annual growth rate. In the most recent quarter, BNS’s earnings declined much more than the five-year compounded average, so these growth issues may persist.
The final verdict
Having looked at all the relevant factors, Scotiabank appears fairly safe as a pure dividend play. With its 52% payout ratio, BNS is not going to have issues with dividend sustainability. Even if earnings go down a bit more, it should be fine. I personally think that BNS’s earnings will likely grow in the years ahead. Interest rates are rising, and banks get to charge more interest on loans when rates are high. We’ve seen that already with the big U.S. banks We’ll be hearing from Scotiabank next month.
