Contrarian investors have a chance to buy some top TSX dividend stocks at discounted prices to secure high yields and a shot at big potential gains on a rebound. Bank of Nova Scotia (TSX:BNS), for example, is down more than 30% from the 2022 highs.
Buying stocks when they are out of favour takes courage and patience, but the long-term total returns can be significant.
Bank of Nova Scotia stock
Bank of Nova Scotia (TSX:BNS) trades for close to $62.50 at the time of writing. That’s up from the 2023 low near $56 but still way off the $93 mark the stock reached in early 2022 on the post-pandemic rebound.
Investors who missed the rally off the 2020 market crash are wondering if Bank of Nova Scotia is now oversold again and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a Registered Retirement Savings Plan (RRSP) focused on growing the portfolio by reinvesting dividends in new shares.
It depends on where interest rates are headed in 2024. Bank stocks rallied over the past two months on a switch in market sentiment. Bargain hunters started to buy the battered shares of financials on the expectation that the Bank of Canada and the U.S. Federal Reserve have topped out on interest rate increases and will be forced to reduce rates in 2024. The idea is that reduced borrowing costs will ease pressure on businesses and households that are struggling to make payments on their loans. Lower rates would also support more investment by companies and could rekindle an active acquisitions market. If it turns out that the economy navigates a soft landing as rates ease, there is a strong case to buy BNS stock now.
Risks for banks?
The central banks have managed to guide inflation down from 8% in Canada and 9% in the United States to just above 3%, but this is still above the 2% target, and inflation appears to be resisting a move below the 3% level. Wage growth remains robust as workers take advantage of tight labour market conditions to get better pay. Geopolitical instability threatens to upend the progress made to ease supply issues that drove a good chunk of the inflation in the past three years.
If the central banks are forced to hold interest rates at current levels through 2024 there could be another leg to the downside on the way for bank stocks.
Should you buy Bank of Nova Scotia today?
Bank of Nova Scotia’s new chief executive officer is working hard to drive better returns for shareholders. The company trimmed staff by 3% last year and is shifting its growth strategy away from America to focus more on Canada, the United States, and Mexico. It will take some time for investors to see the benefits of the efforts, but the stock still looks oversold, and the surge that occurred in the past two months is a reminder of how quickly bank stocks can recover.
Bank of Nova Scotia remains very profitable and pays an attractive dividend that should continue to grow. Investors who buy the stock at the current levels can get a 6.75% dividend yield, so you get paid well to ride out some additional turbulence.
Near-term volatility should be expected, but investors with some cash to put to work in a buy-and-hold TFSA or RRSP should probably put BNS on the radar.