How Bank of Nova Scotia’s 3.6% Yield Grew to 8.5%

You would have more than doubled your income from Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) from an investment made in 2004. The concept of compounding works on any quality investment that becomes more valuable over time.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

We all know the Canadian banks are solid, stable investments, and they pay out excellent dividends. But just how good are their dividends? We’ll use Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) as an example here.

Recent performance and actual valuation

If you’re relatively new to investing, you might be pouting about missing Bank of Nova Scotia shares at the recent August low of $56. Today it has risen over 7% and is priced at $60. But that’s just the recent price action.

In reality, the Canadian bank is still relatively cheap compared with historical valuation levels.

The bank is trading around a multiple of 10.5, while it normally trades at a multiple of 12.3; that implies a fair value estimate of $68.50. So, the shares are still roughly 12% discounted. For a business that has paid dividends for more than 180 years, it’s a pretty good deal.

The power of dividend growth: a 3.6% yield in 2004 to 8.5% in 2015

From 2004 to 2014, the bank managed to increase dividends by a compound annual growth rate of 9%. So, if you bought shares in 2004, by 2014 your income from dividends would have more than doubled. Assuming you’d received $100 from Bank of Nova Scotia in 2004, your income would have climbed to $236.7 by 2014.

Actually, at the start of 2004, Bank of Nova Scotia cost $33 per share, and its annual payout was $1.60 per share. So, you would have needed to buy 63 shares, or invest $2,079, to get $100 per year.

If you had held the shares until the end of 2014, you would have received $21.19 per share of dividends over a period of 10 years. You would have gotten back 64% of your initial investment.

Bank of Nova Scotia now pays a 70 cent quarterly dividend. Plus, the shares are worth over $60 today, or close to $3,800. So, your investment would have gone up over 81% if you held on to your shares. Based on your initial investment of $33 per share, the bank now pays a yield of 8.5%.

What drives dividend growth?

Ultimately, healthy dividends are supported by earnings. From 2004 to 2014, Bank of Nova Scotia’s earnings per share increased steadily from $2.82 to $5.72, a compound annual growth rate of 7.3%.

Solid dividend payers also only pay out a portion of their earnings as dividends. In 2004, Bank of Nova Scotia’s payout ratio was 39%. It only paid out 39% of its earnings as dividends at the time. In 2014, the bank paid out 45% of earnings. So, it retained 55% of earnings to grow the business.

To summarize

By buying and holding shares of quality dividend payers over the long term, you allow time for compounding to work.

The concept of compounding works on any quality investment that becomes more valuable over time. Today, with roughly a 12% discount in its shares, it’s not a bad time to start buying Bank of Nova Scotia shares.

Should you invest $1,000 in CIBC right now?

Before you buy stock in CIBC, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and CIBC wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of The Bank of Nova Scotia (USA).

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Bank Stocks

An investor uses a tablet
Bank Stocks

Where Will TD Bank Be in 2 Years?

TD stock has come under scrutiny over the last few years, but does the future look brighter?

Read more »

open vault at bank
Stocks for Beginners

Where Will Royal Bank Stock Be in 2 Years?

Royal Bank stock has long been a top stock, but can that last over the next two years?

Read more »

grow money, wealth build
Dividend Stocks

Here’s How Many Shares of Scotiabank Stock You Should Own for $2,000 in Annual Dividends

Scotiabank stock remains a top stock for dividends, so here's how much investors would pay for a $2,000 income stream.

Read more »

a man celebrates his good fortune with a disco ball and confetti
Stocks for Beginners

Where Will Royal Bank of Canada Be in 5 Years?

Royal Bank stock remains one of the top stocks on the market today – and still the largest by market…

Read more »

calculate and analyze stock
Bank Stocks

TD Bank: Buy, Sell, or Hold in 2025?

TD stock has been around for almost 100 years! Yet the last year hasn't been the best example of greatness.

Read more »

analyze data
Bank Stocks

Here’s Exactly How Many Shares of TD Bank You’d Need for $5,000 in Annual Dividends

You needn't invest a whole lot to get $5,000 in dividend income from Toronto-Dominion Bank (TSX:TD) stock.

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

TD Bank Stock: Buy Now or Wait?

TD Bank is up 12% in 2025. Are more gains on the way?

Read more »

open vault at bank
Stocks for Beginners

TD Bank vs. Royal Bank: How I’d Invest $15,000 Between Canada’s Banking Leaders

In the battle of the top bank stocks, which one comes out on top?

Read more »