Investing in dividend stocks can be an effective long-term wealth-creation strategy, allowing investors to benefit from both capital appreciation and regular dividend income. However, dividend payments are not guaranteed and depend on a company’s financial performance, cash flow generation, and management’s capital-allocation decisions. Therefore, investors should prioritize established businesses with strong fundamentals, healthy cash flows, and a proven track record of dividend payments. Such companies can also provide greater portfolio stability during market volatility and economic uncertainty.
Against this backdrop, I believe Bank of Nova Scotia (TSX: BNS) could be an attractive investment, given its dividend history dating back to 1833. Let’s examine the bank’s business outlook, growth prospects, dividend track record, and valuation to determine whether its stock is a compelling buy right now.
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Scotiabank’s business outlook
Scotiabank offers a broad range of financial services across multiple markets, diversifying its revenue streams and supporting relatively stable earnings and cash flows across economic cycles. Its resilient business model has helped the bank deliver a total return of over 570% over the past 20 years, representing an annualized return of approximately 10%. The bank has also paid dividends uninterrupted since 1833 and increased payouts at an annualized rate of 4.5% over the past decade. It currently offers a forward dividend yield of 3.6%.
Scotiabank also reported strong third-quarter results in August, with net income rising 18.1% year over year to $3 billion and adjusted earnings per share (EPS) increasing 21.1% to $2.28. All four operating segments recorded earnings growth, led by Global Wealth Management and Global Banking and Markets. Meanwhile, its return on equity (ROE) improved to 14.2% from 12.4% a year earlier, surpassing the bank’s 14% target. However, its Common Equity Tier 1 (CET1) ratio declined by 20 basis points to 13.1%, reflecting business expansion, the recall of a synthetic risk transfer securitization, and share repurchases.
Capitalizing on its solid financial performance, Scotiabank repurchased 8.6 million shares during the quarter. The bank also returned $6.3 billion to shareholders through dividends and share buybacks during the year. With its financial performance strengthening, let’s examine the bank’s growth prospects.
Scotiabank’s growth prospects
The ongoing conflict in the Middle East has disrupted global energy supplies, pushing oil prices higher and adding to inflationary pressures. If inflation remains persistent, central banks may delay interest rate cuts, which could support Scotiabank’s net interest income and lending margins. However, the impact will depend on the pace of rate changes, deposit costs, and overall lending activity.
Meanwhile, Scotiabank is reshaping its geographic footprint by expanding its more profitable North American operations while scaling back its exposure to less profitable and riskier South American markets. This strategic shift could improve earnings quality, strengthen financial performance, and support more stable cash flows over time.
Earlier this month, the bank increased its share repurchase target from 15 million to 40 million shares, having repurchased about 13 million shares as of August 31. The expanded program could reduce its outstanding share count by about 3.3% from the program’s March starting level, potentially boosting earnings per share and enhancing shareholder value.
Considering its strategic repositioning, potential benefits from interest rate trends, and expanded share repurchase program, I believe Scotiabank has healthy growth prospects.
Investors’ takeaway
Supported by its strong financial performance, Scotiabank has delivered an impressive year-to-date return of 29.6%, outperforming the broader equity markets. Despite this strong rally, the bank’s valuation remains reasonable, with next-12-month price-to-sales and price-to-earnings multiples of 3.7 and 13.6, respectively. Given its solid underlying business, consistent dividend payouts, healthy growth prospects, and attractive valuation, I believe Scotiabank is a compelling long-term investment opportunity for investors seeking both income and capital appreciation.
