Yet another bank earnings season is wrapping up, and the results have been mixed overall. Undoubtedly, headwinds continue to pressure Canada’s top banks. And as provisioning activity continues to be the talk of the town, questions linger as to when the big banks will have the means to rally back to new highs again. Indeed, it’s been quite a rough past several years for the big banks since peaking out just a few years ago.
Though there were some encouraging glimmers of hope for some of the banks that recently reported, I can’t say that investors are in a rush to get back into the top-tier financial heavyweights, even as their dividend yields skew towards the higher side. With interest rates likely to come down from here, I believe that the big bank dividend yields could begin to retreat as well, thanks in part to capital appreciation.
Canadian bank dividend yields are lofty and probably buyable
After all, today’s above-average dividend yields are a sign of the times. When you can grab 5% or so from risk-free securities, you’ll need a similar, if not greater, yield from the dividends of “risky” stocks. And with the big bank stocks navigating through some harsh industry conditions, perhaps greater than 5% has become the new normal, with some of the more pressured bank stocks yielding well north of the 6% mark.
Though the 4% rule is a prudent rule for passive-income investors to invest by, I think it makes sense to consider some of Canada’s higher-yielding banks, as they can give you a nice raise (with future raises to come in the form of dividend hikes) amid what remains of inflation, and beyond.
Personally, I think inflation is only going to go lower from here, with the 2% mark in sight and the potential for sub-2% inflation, as generative artificial intelligence technologies look to apply some disinflationary pressures over the next two to three years. Either way, I believe the bank dividends are worth their weight in gold. Further, I don’t think the days of 5-6.5% dividend yields in the banks are going to last for very long. Not while rates fall and the Canadian economy looks to move past its battle with high inflation.
Let’s look at one of the most interesting Canadian bank stocks that look to be worth the price of admission as we look forward to the next round of quarterly earnings results, which, hopefully hold more in terms of positive surprises!
Scotiabank: The best bank for your buck?
Scotiabank (TSX: BNS) stock has been on a nice rally since the lows of October. Since then, the stock has gained more than 20% — an impressive run that may still have legs. Year to date, shares of BNS are up a respectable 4.2%. Quite the feat, considering many Canadian bank stocks are in the red so far in 2024.
For the latest quarter, Scotiabank’s numbers were pretty good, given the circumstances. The common equity tier-one ratio remains strong, even as provisions for credit losses (around $962 million for the quarter) dealt a blow. The company reported $1.68 per share in earnings, well ahead of the earnings numbers posted in the same quarter (Q1) a year prior.
With robust earnings and the means to expand margins, I’d not be surprised if Scotiabank leads the big bank stocks higher from here. Even if its peers can’t sustain a rally, I think higher highs could be ahead. For now, the 6.44% yield looks worth grabbing while shares are still cheap at 10.8 times trailing price to earnings.
