Many dividend stocks, which long-term investors seeking income would buy, have corrected. One key reason is that higher interest rates have made lower-risk fixed-income investments a better competitor for investors to buy for income.
These Canadian dividend stocks have generally bounced a bit after a correction but they remain attractive for income today. Notably, thanks to the dividend tax credit, Canadians can enjoy lower income tax on the dividend income received in non-registered accounts.
For a solid big Canadian bank that can normally make returns on equity in the teens range, Bank of Nova Scotia (TSX:BNS) is attractively priced for big dividend income and long-term investing. For example, its five-year return on equity is north of 13%.
As Investopedia explains, “return on equity (ROE) is the measure of a company’s net income divided by its shareholders’ equity. ROE is a gauge of a corporation’s profitability and how efficiently it generates those profits.”
Understandably, the big Canadian bank stock has been pressured by a higher interest rate environment, leading to a higher provision for credit losses (PCL) and lower earnings as a result. Particularly, it also operates in higher-risk emerging markets. So, its percentage of bad loans is anticipated to be above average.
At $59.15 per share, Scotiabank stock trades at about 8.4 times earnings — a meaningful discount of approximately 24% from its long-term normal price-to-earnings ratio (P/E). Moreover, it offers a rich dividend yield of just under 7.2%. Its recent earnings still cover its dividend with leftovers, but its recent payout ratio is higher than normal. Because of the higher PCL, its trailing 12-month payout ratio is roughly 70% of net income available to common shareholders.
The bank also has a treasure chest of retained earnings, which Investopedia describes as “a firm’s cumulative net earnings or profit after accounting for dividends.” Since its inception, Scotiabank has retained earnings of approximately $55.8 billion, which could act as a buffer for its dividend. However, the bank did not need to touch it to pay dividends, because it has remained profitable with a sustainable payout ratio.
BNS, MFC, and XIU 1-year data by YCharts
Manulife (TSX:MFC) is another cheap stock in the financial services sector. Notably, the life and health insurance stock has been trading at a discount multiple for a number of years. Regardless, in this period, the company has been profitable and has been paying a healthy and growing dividend. MFC stock’s 10-year dividend-growth rate is roughly 9.8%. In normal years, Manulife also earns an ROE of more or less 12%.
Assuming a low target P/E of about 9.8, at $25.73 per share at writing, the stock trades at a discount of about 22%. At this quotation, the dividend stock offers a yield of almost 5.7%. Based on adjusted earnings, its approximated payout ratio is 43% this year.
The stock would experience P/E expansion if its Asia-focus growth strategy plays out. Other than providing insurance and wealth products in Japan and Singapore, it also operates in Hong Kong and Mainland China.
The stock has the potential to deliver annualized returns of about 14.5% over the next five years, including paying a nice dividend.