Finally, the big Canadian banks have slid a bit, so dip buyers can think about stepping in. Indeed, those who’ve been waiting for a rise in volatility have been kept sidelined for quite a while. In my humble opinion, there’s no sense in starting to get worried about the bank trade just because the group is starting to weigh down the TSX Index. At the end of the day, the Canadian market has been able to shrug off recent banking pressures, thanks in part to significant strength in the gold miners as well as large-cap tech. Indeed, as it turns out, the Canadian stock market isn’t just about the Big Six banks.
Of course, they do play a big part, and if the TSX Index is to break out further, I do think the group needs to get going. Whether or not earnings season will allow the Big Six to move past Go while collecting $200 remains the big unknown right now. It’s unsettling to have to buy a stock going into earnings season while momentum has exhausted itself. But, in my view, it’s times like these when there’s more value to be had by investors who understand that a bit of near-term pain is often the cost when it comes to getting high-quality dividend growers at slight discounts.
man withdraws money from ATM
Bank of Nova Scotia
For income investors who want big upfront dividend yields, capital appreciation potential, dividend growth, and a reasonable relative price of admission, I like shares of Bank of Nova Scotia (TSX: BNS). The 3.8% dividend yield is just one of the reasons why I prefer the name as we head into what’s sure to be a more challenging season for the banks. The stock is down just north of 5% from all-time highs. And, depending on how earnings go, the stock will be closer to a correction or its all-time highs. By the time this piece is published, the quarterly results will probably be released.
And depending on what’s served up as well as the market’s mood, BNS might go from a mild buy while it’s halfway to a correction to a must-buy as the bank looks to make its next move. Regardless of how the results go, I think the shares are a great bet because of the relative discount (16.5 times trailing price-to-earnings (P/E), which isn’t bad considering much of the Big Six go for P/E multiples in the high-teens) and the dividend that could surpass 4% before many of its rivals hit the 3% yield mark.
With the strategic shift towards the U.S. market and slightly away from the more volatile Latin American market, I do think the risk/reward is that much more compelling. Of course, Bank of Nova Scotia isn’t yet a force in the U.S. market. However, with low-risk optionality to increase its exposure to U.S. banking and room to take a page out of the playbook of its Canadian rivals, I do think a strong case for a more in-line multiples makes sense for shares of BNS.
So, if you want more dividends from a financial, shares of BNS may very well be today’s best bank.
