Conventional wisdom says stocks are riskier than bonds — and government bonds, in particular, are often seen as the ultimate in safety. After all, when you lend money to the government, you expect to get it back, plus steady interest. But in a world of ever-higher cost of living, the definition of “safety” deserves a closer look.
In fact, one high-yield Canadian dividend stock — Bank of Nova Scotia (TSX: BNS) — could be a safer long-term investment than certain government bonds. Here’s why.
Source: Getty Images
Bonds may feel safe, but offer limited returns
Bonds do offer stability — especially government-issued ones — but that comes at the cost of lower income and limited growth potential. For example, a Canadian government bond maturing on December 1, 2030, trades at a discount of around $87.83, with a coupon of just 0.50%. Hold it to maturity, and you’ll earn a total annual return of roughly 3.0%.
While that’s not terrible for a low-risk investment, it barely keeps pace with long-term inflation, which averages about 2-3% per year in Canada. Worse, if you need to sell before maturity and interest rates have risen, your bond may have lost value in the secondary market.
Bonds can lose purchasing power over time, and in a world where inflation quietly erodes wealth, the real risk might not be volatility — but underperformance.
Bank of Nova Scotia: High yield and long-term growth
In contrast, Bank of Nova Scotia stock currently offers a dividend yield of 5.6% at a share price of around $78. That’s almost double the return of the government bond, and you don’t have to wait until maturity to benefit — the income starts flowing immediately and is specifically paid out quarterly.
BNS has a strong dividend history, having paid uninterrupted dividends since 1833. Its current payout ratio is about 63% of adjusted earnings, suggesting the dividend is well-covered and sustainable. In addition, the bank’s price-to-earnings (P/E) ratio of 11.5 is in line with historical averages, signalling that shares are fairly valued — not overpriced.
Yes, stocks come with price volatility. Bank performance can be affected by economic cycles, loan defaults, or regulatory changes. However, over longer periods, the bank’s ability to grow earnings and dividends gives it a clear edge over fixed-income investments. As earnings rise, so too can the dividend — something bonds simply can’t do.
Safer — but with a long-term view
It might sound counterintuitive to say a stock is safer than a government bond, but it depends on how you define safety:
- Principal protection: Stocks are more volatile, but long-term investors can ride out fluctuations.
- Income: BNS pays nearly twice the income of a comparable bond, assuming an investment period of roughly five years.
- Inflation protection: Earnings growth potential that could lead to dividend growth helps protect purchasing power.
Earlier this year, BNS dipped into the low $60s, presenting a great entry point. Even at current levels, it’s a good hold for long-term investors, especially those willing to buy on weakness.
If your time horizon is at least five years and you want to generate reliable income with inflation-beating total returns, Bank of Nova Scotia may not just be a safer alternative to bonds — it might be the smarter one.
