The stock market gives and takes. Returns can come and go. But when it comes to income stocks, it seems as though these stocks should continue to dish out dividends for decades. Well, that’s not always the case.
In fact, there are income stocks that can remain quite risky and others that, while trading downwards, offer a superior chance to get rich. How? It’s because of compounding interest.
Investors can buy strong companies and look forward to years of returns while collecting dividends from these income stocks and reinvesting them back into the companies. Today, let’s look at two of these TSX income stocks and why they belong in your long-term portfolio.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS), commonly known as Scotiabank, is one of Canada’s largest banks with extensive operations in international markets, particularly in Latin America, the Caribbean, and Asia. Scotiabank’s strategic focus on high-growth international markets provides a unique growth opportunity compared to its peers.
The bank’s presence in Pacific Alliance countries (Mexico, Peru, Chile, and Colombia) positions it well to capitalize on economic growth in these regions. Plus, Scotiabank’s digital transformation initiatives are expected to enhance operational efficiency and customer experience, driving future growth.
Scotiabank has demonstrated robust financial performance during the last several quarters, with consistent revenue and earnings growth. The bank reported a revenue of $31.25 billion in FY 2023, reflecting a 4% year-over-year growth. Furthermore, its net income reached $9.47 billion, driven by strong performance in both its Canadian and international banking segments.
Then there’s the stable dividend. Scotiabank offers a high dividend yield of 6.73%, one of the highest among Canadian banks. The bank has a history of stable and growing dividend payments, making it an attractive option for income-focused investors. Plus, the current payout ratio stands at approximately 70% shows it holds a sustainable dividend policy.
Of course, investors should consider the potential risks associated with Scotiabank. In particular, its international exposure, including economic volatility in emerging markets and foreign exchange risks. However, the bank’s diversified revenue streams and strong capital position mitigate these risks to some extent.
Alimentation Couche-Tard
Then we have Alimentation Couche-Tard (TSX:ATD), a leading global convenience store operator with a network of over 14,200 stores across North America, Europe, and other regions. The company operates under several well-known banners, including Circle K.
Couche-Tard’s growth strategy involves both organic expansion and strategic acquisitions. The company’s recent acquisitions in the U.S. and Europe have significantly enhanced its market presence. Additionally, Couche-Tard’s focus on food service, fuel, and digital initiatives is expected to drive future growth and profitability.
This has been seen through strong financial performance. Couche-Tard has shown several strong quarters, with a compound annual growth rate (CAGR) of 8% in revenue over the past five years. For fiscal year 2023, the company reported revenue of $73.4 billion and a net income of $2.8 billion, reflecting its efficient operational model and strong market position.
While Couche-Tard’s dividend yield of around 0.85% is relatively modest, the company has a track record of consistently increasing its dividend—especially with a payout ratio of just 16%! The focus on reinvesting earnings into growth opportunities while gradually increasing dividends should, therefore, appeal to long-term growth-oriented investors.
There are, of course, a few risk factors here as well. Key risks include fluctuations in fuel prices, integration risks associated with acquisitions, and potential regulatory changes affecting the convenience store industry. However, Couche-Tard’s diversified business model and strong cash flow generation provide a buffer against these risks.
Bottom line
Both Bank of Nova Scotia and Alimentation Couche-Tard present compelling long-term investment opportunities. Scotiabank’s high dividend yield and strategic international focus make it a solid choice for income-oriented investors. Meanwhile, Couche-Tard’s strong growth prospects, efficient operational model, and strategic expansion initiatives offer significant potential for capital appreciation. Investors seeking a balanced portfolio with a mix of income and growth should consider adding these two stocks to their long-term investment strategy.
