Contrarian investors seeking high-yield passive income and a shot at decent capital gains have a chance to buy cheap Canadian dividend stocks for their self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolios.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $64 per share at the time of writing compared to $93 two years ago.
The extended decline is largely due to the rise in interest rates in Canada and the United States as the Bank of Canada and the U.S. Federal Reserve battle to get inflation under control.
Higher interest rates are normally positive for the banks as they give the financial institutions an opportunity to earn better net interest margins. The steep rise in rates over such a short period of time, however, is putting businesses and households with too much debt in difficult positions. As a result, loan defaults are expected to rise, and this has markets concerned that the banks might be in for a rough ride.
Rate hikes take time to work their way through the economy. The central banks are trying to reduce inflation by cooling off demand and bringing the jobs market back into balance. There is a risk that they will keep rates too high for too long and trigger a serious recession. If unemployment surges, the banks could see loan losses balloon.
Bank of Nova Scotia earnings
Bank of Nova Scotia raised its provision for credit losses (PCL) in fiscal 2023 compared to 2022, and the trend is continuing in the current fiscal year. The bank just reported fiscal first-quarter (Q1) 2024 results, with the PCL amount for the quarter rising to $962 million from $638 million in fiscal Q1 2023. Most of the provision ($942 million) was for impaired loans largely located in the international banking portfolios in Chile, Colombia, and Peru.
Bank of Nova Scotia announced a strategy shift late last year that will see the bank focus more on growing its business in Canada, the United States, and Mexico. The operations in South America could potentially be monetized as part of the transition. The bank also reduced staff by about 3% last year to cut expenses.
A $1 billion provision for credit losses sounds like a lot, and the increase from last year indicates rising challenges for over-leveraged customers, but the charge is still very small relative to the total loan portfolio, which remains in solid shape.
Bank of Nova Scotia finished fiscal Q1 2024 with a common equity tier-one (CET1) ratio of 12.9%. This is above the 11.5% required by Canadian banking regulators and indicates the bank has a good capital cushion to ride out some tough times.
Adjusted net income came in at $2.21 billion for the quarter compared to $2.35 billion in Q1 2023. The bank remains very profitable, and the dividend should be safe.
Dividends
Bank of Nova Scotia increased the dividend for 2024. Investors who buy the stock at the current level can get a 6.6% dividend yield.
Is Bank of Nova Scotia a buy now?
Ongoing volatility should be expected until there is evidence the central banks will start to cut rates. Markets want to see indications that increases in the provisions for credit losses are slowing down before driving bank stocks meaningfully higher.
That being said, BNS stock is probably oversold at this level, and you get paid well to wait for the rebound. If you have some cash to put to work, Bank of Nova Scotia deserves to be on your radar for a contrarian dividend pick.
