As interest rates have recently dipped, many investors are reevaluating their options for generating income. With one-year guaranteed investment certificates (GICs) now yielding around 4%, more capital may flow toward high-yield stocks like Bank of Nova Scotia (TSX: BNS). Despite stocks being inherently riskier compared to GICs, BNS’ 5.7% dividend yield makes it an attractive option for income-focused investors.
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The dividend advantage
Bank of Nova Scotia is not just another bank. It’s a historic player in Canada’s financial landscape. With dividends paid every year since 1833, the bank has demonstrated unwavering commitment to returning capital to shareholders. Its impressive 15-year dividend growth at a compound annual growth rate (CAGR) of 5.3% outpaces the long-term inflation rate of 2–3%. This makes BNS not just a reliable source of income, but also a compelling hedge against inflation.
Additionally, dividends from BNS are taxed more favourably than interest income in non-registered accounts. This creates a double advantage for investors: robust income paired with a more advantageous tax treatment.
However, it’s crucial to ensure that this income is safe. BNS’s trailing 12-month dividend payout ratio is around 80% of net income available to common shareholders, indicating that the bank’s earnings still cover its dividend. With estimates suggesting a payout ratio of approximately 65% of adjusted earnings and 68% of diluted earnings this fiscal year, the dividend appears to be sustainable.
Assessing BNS’ growth potential: Revenue vs. earnings
While Bank of Nova Scotia boasts strong revenue growth, translating that into earnings growth has been more challenging. Over the past decade, revenue per share rose at a CAGR of 9.4%, but diluted earnings per share have only increased by 1.2% annually. This disparity raises questions about the bank’s efficiency in converting revenue into profits.
Last quarter, the bank’s international banking segment reported a net interest margin of 4.4%, outperforming the Canadian banking segment’s 2.5%. This signals potential for earning higher net interest income as BNS capitalizes on growth in Latin American markets, which are expected to outpace the Canadian economy through 2025. Under the leadership of its fairly new chief executive officer, Scott Thompson, who took the helm in February 2023, it may take a couple of years for the bank’s performance to start reflecting his growth initiatives.
Weighing risks and returns
At $73.87 per share at writing, BNS stock is fairly valued, offering a solid dividend yeild of 5.7%. This yield presents a compelling alternative to traditional GICs, providing approximately 43% more income. However, potential investors should remain aware of the inherent risks involved in stock investing. Although the Canadian bank stock offers the potential for capital gains in the long run, it’s essential to approach this investment with a long-term perspective because there will certainly be uncertainty and volatility in between.
Investors should carefully consider their risk tolerance and investment strategy. BNS stock may be well-suited for those looking to take on higher risk for the chance of greater income and capital appreciation. As with any investment, conducting thorough research and consulting a financial advisor can help in making informed decisions.
The Foolish investor takeaway
Bank of Nova Scotia’s attractive 5.7% dividend yield, combined with its long history of paying dividends, makes it a good candidate for income-focused investors. However, it’s crucial to weigh the potential risks against the rewards. If you’re considering a long-term investment, BNS stock could serve as a reasonable addition to your portfolio, offering both income and growth potential.
