1 Dividend Stock Down 20% to Buy Right Now

Bank of Nova Scotia is a good income stock that’s fairly valued and can deliver solid long-term returns.

| More on:

Image source: Getty Images

A stock falling a lot doesn’t necessarily mean it’s cheap and a buy. In the case of dividend stocks, a lower stock price means a higher dividend yield and more income for investors – given the dividend is sustainable and isn’t expected to be cut. And, of course, you should also expect the business to turn around within a reasonable timeframe.

Bank of Nova Scotia (TSX:BNS) stock peaked at approximately $82.50 per share in 2022. Since then, the big dividend stock has come off meaningfully. At $65.53 per share at writing, it is 20% lower than its 2022 peak and offers an eye-popping dividend yield of close to 6.5%.

A stock that acts like a GIC

This is a perfect perpetual income-generating opportunity for long-term investors. The risk-free one-year guaranteed investment certificate (GIC) offers an interest rate of about 5%. It is risk-free in the sense that it provides principal protection.

The same investment in Bank of Nova Scotia common shares offers about 30% more income, plus future income growth potential. However, investors are taking the risk of the underlying business as well as enduring the stock volatility that comes with it.

Risk vs rewards

In recent years, the international bank’s earnings have been more of a rollercoaster ride than for its peers, which is why the stock hasn’t performed as well. This is where the income opportunity comes in, as investors could very well park some money in the stock for juicy income.

For example, during the pandemic in fiscal 2020 year, Bank of Nova Scotia experienced an earnings-per-share (EPS) drop of 21% compared to the other Big Six Canadian bank’s EPS decline average of almost 15%. (If you’re curious, the most resilient of the Big Six was National Bank of Canada.).

Bank of Nova Scotia has riskier assets, given that a good portion of its operations are in developing markets that could experience higher growth but also have higher risk. These markets generally have higher levels of bad loans, especially during economic downturns. In a world of higher interest rates, the BNS stock price momentum remains weak.

A big dividend

So, the focus on the stock remains its big dividend. Its trailing-12-month payout ratio is about 74% of earnings. Based on adjusted earnings, its payout ratio is estimated to be about 65% this year. Its dividend is still covered by earnings, but since the normal payout ratio should be about 50% for the big Canadian banks, the bank might decide to freeze its dividend temporarily. This would be a hard decision to make and would depend on when management expects to see a resumption of growth.

Investors could view BNS stock similar to a “GIC”. With a long-term investment horizon, it’s hard to lose money from a decline in the stock price seeing as the stock trades at a very reasonable price-to-earnings ratio of about 10 today. Its long-term normal multiple is close to 11.

Assuming a conservative EPS growth rate of 5% per year and some valuation expansion to 10.5 times, the stock could still deliver roughly 12% per year over the next five years with more than half of the returns coming from its safe dividend. That would be a solid return for a blue chip stock and why I think long-term investors should consider BNS stock for their diversified portfolios.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

More on Dividend Stocks

investment research
Dividend Stocks

2 TSX Stocks to Buy in 2024 and Hold for the Next 10 Years

Are you looking for some great TSX stocks to buy in 2024? The market is full of options, but these…

Read more »

Dividend Stocks

Pensioners: 2 Stocks That Cut You a Cheque Each Month

Monthly pay dividend stocks like First National Financial (TSX:FN) cut you a cheque each month.

Read more »

money cash dividends
Dividend Stocks

Want Decades of Passive Income? 2 Energy Stocks to Buy Now and Hold Forever

Are you wondering what TSX energy stocks could pay and grow their dividends for decades ahead? Here are two for…

Read more »

The sun sets behind a power source
Dividend Stocks

2 No-Brainer Utilities Stocks to Buy Right Now for Less Than $200

These two utilities stocks can be some of the best picks for investors if you want to shell out some…

Read more »

financial freedom sign
Dividend Stocks

Million-Dollar TFSA: 1 Way to Achieve to 7-Figure Wealth

Achieving seven-figure TFSA wealth is doable with two large-cap, high-yield dividend stocks.

Read more »

analyze data
Dividend Stocks

How Much Will Manulife Financial Pay in Dividends This Year?

Manulife stock's dividend should be safe and the stock appears to be fairly valued.

Read more »

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »