Bank of Nova Scotia (TSX: BNS) has faced its share of challenges over the past decade, notably underperforming both the broader Canadian stock market and the banking sector. When compared to iShares S&P/TSX 60 Index ETF and BMO Equal Weight Banks Index ETF, BNS stock has trailed behind over the past one, three, five, and 10 years. However, despite this underperformance, many investors may still be considering whether Bank of Nova Scotia is a buy, sell, or hold in 2025. Let’s take a closer look at why this bank might still have a place in your portfolio.
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Attractive dividend yield: A key income play
One of the primary reasons investors might hold onto or buy Bank of Nova Scotia stock is its attractive dividend yield. With a current yield of 5.9%, BNS stands out as a strong income stock in comparison to both the banking sector (with a recent yield of 3.9%) and the broader Canadian market (2.8%). This makes the stock particularly appealing to income-focused investors, such as retirees, who rely on dividends for steady cash flow.
However, a high yield is not the only factor investors should focus on. It’s important to ensure that the dividend is sustainable over the long term, especially given the bank’s history of underperformance. To assess sustainability, investors should examine its payout ratio. In the fiscal year ending October 2024, Bank of Nova Scotia paid out 78% of its diluted net income and 66% of its adjusted earnings in dividends. While these ratios suggest that the dividend is well-covered by earnings, they are higher than the bank’s long-term average payout ratio, which has typically been below 50%. As some years witness higher payout ratios, it’s a reminder to monitor the bank’s earnings and its ability to continue paying out such a high dividend.
Fairly valued with potential for growth
Another key consideration is whether Bank of Nova Scotia is a good value at its current price. As of writing, the stock is trading at $71.89 per share, with a blended price-to-earnings (P/E) ratio of 10.8. This aligns with the bank’s historical valuation, suggesting that the stock is fairly priced. With analysts projecting modest earnings growth over the next few years, even without any significant change in valuation, the stock could deliver solid returns, driven largely by its dividend.
This makes BNS a potential candidate for investors seeking a balanced mix of income and capital appreciation. Even if the stock price were to remain relatively flat, the combination of a healthy dividend and steady earnings growth could lead to an annualized return of 10-12% over the next few years, which is an attractive prospect for long-term investors.
The Foolish investor takeaway: A “hold” with income appeal
Considering that Bank of Nova Scotia has been a reliable blue-chip stock, consistently increasing or maintaining its dividend for at least 50 years, it remains an attractive choice for investors focused on income. Its current valuation and dividend yield suggest that it is a “hold” for those who already own it. For investors looking to enter the stock, those seeking income or long-term price appreciation might consider buying now. However, for those who prefer a larger margin of safety, it might be prudent to wait for a market correction before jumping in.
Ultimately, whether Bank of Nova Scotia is a buy, sell, or hold in 2025 depends on your investment goals. If you’re looking for a steady income stream with moderate growth potential, BNS might be a good fit.
