When it comes to investing, the pursuit of passive income is an attractive strategy for those who seek stability and reliability. Dividend stocks, in particular, are a proven way to generate consistent returns while allowing investors to pay less attention to short-term market fluctuations. If you’re aiming for long-term wealth generation through dividends, investing in a high-quality, blue-chip stock like Bank of Nova Scotia (TSX:BNS) could be your path to earning substantial passive income.
Bank of Nova Scotia: A top dividend stock for passive income
For investors seeking a solid dividend stock, Bank of Nova Scotia stands out among Canada’s major banks. Known for its stability and strong dividend history, it offers a healthy yield that surpasses its peers. At $79.79 per share as of writing, the bank currently delivers a dividend yield of over 5.3%, significantly higher than the Canadian banking sector of 3.9%, as seen in BMO Equal Weight Banks Index ETF.
With this yield, an investment of $15,000 in Bank of Nova Scotia would generate approximately $797 in annual passive income, paid out as quarterly dividends. But that’s not all — this stock offers growth potential alongside its reliable dividends. The bank has made a remarkable recovery in terms of price appreciation, and with its shares now trading at a valuation in line with long-term normal multiple, there’s potential for further growth.
Stability backed by solid financials
Bank of Nova Scotia is well-positioned to provide reliable and safe passive income. The bank generates a significant portion of its earnings from its Canadian operations, where it enjoys high returns on equity. In the first three quarters of the fiscal year, Bank of Nova Scotia reported net income of $3.2 billion from its domestic business.
Despite some earnings pressure in recent years, which is expected to increase the bank’s payout ratio to approximately 68% of adjusted earnings in fiscal 2024, the dividend remains secure. The bank has consistently paid dividends, typically distributing about half of its earnings to shareholders. The payout ratio, while higher than usual, still reflects the bank’s strong financial foundation and its commitment to returning value to shareholders.
Growth potential in international markets
While its Canadian operations provide the stability needed for passive income, Bank of Nova Scotia’s international exposure offers exciting growth opportunities. The bank has a presence in Latin America, where emerging markets could fuel higher long-term growth. Though international operations come with higher risk, they complement the more stable returns generated from the bank’s home market, providing a balanced approach to both growth and income.
As Bank of Nova Scotia has maintained its dividend at the same level for the past six quarters, it’s clear that the bank is committed to its shareholders. With the recent 50% recovery in the stock from last year’s lows, the market is optimistic about the bank’s future. As the bank’s earnings grow, it is likely that dividends will increase as well, creating a powerful combination of passive income and capital appreciation for investors.
The bank reports its fiscal 2024 results today, which should give investors further insight. At current levels, the stock is a reasonable buy for passive income.
