Passive income has to be one of the most overused terms in investing. In theory, it makes sense. Buy a dividend stock (or several), sit back, and then collect the cash it generates.
In the real world, companies can stumble, dividends can be raised or cut, and that yield can disappear quickly.
That’s why your passive income can’t be based on any random dividend stock. It should be an established business that has a long history of payments, provides some defensive appeal and some growth to help cover that payout.
Fortunately, there’s more than a few options on the market that can help meet that goal. One example of that is Bank of Nova Scotia (TSX: BNS), and here’s why investors should consider this dividend stock right now.
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Scotiabank is a different type of dividend stock
It would be hard to mention a dividend stock that can generate passive income without thinking of one of Canada’s big bank stocks. And in the case of Scotiabank, it’s entirely justified.
Scotiabank isn’t the largest of the big banks, but it is the most international of the banks. Specifically, the bank has a presence in over two dozen countries around the world. The bank’s main operating units include commercial banking, wealth management, and capital markets services.
This gives Scotiabank multiple ways and markets to generate revenue. The bank earns interest on mortgages and loans and collects fees from banking and investments.
That helps Scotiabank generate the earnings needed to fund its quarterly dividend.
Almost 200 years of passive income
Scotiabank has one of the longest uninterrupted dividend histories in Canada. In fact, the bank has paid shareholders a dividend every year since 1833.
That’s persisted across recessions, wars, market crashes and even predates the Confederation of Canada itself.
Today that dividend pays a yield of 3.46%. Given an initial $40,000 investment, the dividend stock will generate approximately $1,360 in annual dividend income. That’s not enough to retire with on its own, but it can generate 10 additional shares each year from reinvestments alone.
That provides a recurring growth engine for a portfolio that’s usually dismissed by some younger investors who view a dividend stock like Scotiabank as solely for retirement income.
Adding to that appeal is that Scotiabank increased its quarterly dividend by $0.04 to $1.14 per share earlier this year.
Where Scotiabank’s future growth could come from
That storied history makes Scotiabank a great dividend stock to own, but what about the growth needed to support future payments and increases?
That’s where Scotiabank’s large international presence comes into play. In recent years, Scotiabank has shifted its growth focus away from volatile developing markets in Latin America to more mature markets such as the U.S., Mexico and Canada.
That shift lets the bank direct more capital to the markets where it has or is building larger customer relationships.
That being said, the domestic banking business in Canada remains the primary source of revenue for the bank.
Mortgages, loans, deposits, credit cards, and investment products give Scotiabank several opportunities to expand its relationship with each customer.
In the most recent quarter, Scotiabank reported net income of $3 billion. That reflects an impressive 17% year-over-year increase. The Canadian segment contributed $1.1 billion to that net income, which was a 12% increase over the Oprior year. The international segment reported earnings of $725 million, reflecting an 8% increase over the prior period.
Is Scotiabank stock right for your portfolio?
Despite providing nearly 50% gains over the trailing 12-month period, Scotiabank isn’t going to reliably be like a fast-growing tech stock. But that’s also the appeal.
With Scotiabank, investors are getting a dividend stock with a proven ability to keep paying across economic cycles.
This makes Scotiabank a stellar option for investors looking to build a long-term passive income portfolio.
Buy it, hold it, and watch your portfolio (and future income) grow. PPP
