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All investors have one goal in common: they want to maximize their returns while keeping their investment safe. But in this perpetually low interest rate environment, achieving this goal has become extremely difficult.
That being said, there are still some corners of the market where you can get a higher yield while taking manageable risks. Canadian banks, in my view, are at the top of that list. Let’s focus on Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) for that reason.
Canada’s third-largest lender is now yielding more than 5%, which is one of the best returns one could make from these solid banking stocks. If you compare that return with the bank savings rate, GICs, or government bonds, you will realize that buying Scotiabank stock isn’t a bad deal. According to ratehub.ca, the best rate one could get by investing in a five-year GIC these days is close to 3%.
From the total returns perspective, this is also a good time to take a position in a couple of Canadian banks, as their stock prices are under pressure and the values are much more attractive.
The nation’s biggest lenders have been lagging compared with Canada’s main stock gauge this year, which has gained about 15%, including dividends. During the same period, Scotiabank stock didn’t budge, while in the past 12 months, it has fallen more than 12%.
Short-term weakness
The pullback in BNS stock has been largely driven by concerns that the lender’s aggressive acquisition drive will erode profitability in the short run. And that fear is true to some extent.
In the most recent quarterly earnings that BNS reported in May, the lender missed analysts’ estimates, as higher provisions for loan losses tied mainly to takeovers hurt results. Scotiabank set aside more money for soured loans in its Canadian banking and international divisions, leading to a 63% jump in provisions across the bank.
But that weakness may not be there when the lender reports its fiscal third-quarter earnings on Aug. 27. Analysts, on average, are expecting about 9% growth in revenue, while profit per share is expected to grow to $1.85 a share — up from $1.76 from the year-ago period.
According to the management, BNS’s financial performance will improve in the second half of the year due to further contributions from recent takeovers, growth in international banking, and stronger performance in Canadian banking and capital markets, along with expense management and solid capital ratios.
Bottom line
If you’re a long-term investor and seeking to earn stable dividend income, the quarterly performance shouldn’t matter much. Over the long run, Scotiabank has proven to be a great investment with its growing payouts. The lender has returned cash to investors every year since 1832, while it has hiked its payouts in 43 of the last 45 years. After a 2% hike in January, Scotiabank pays a quarterly dividend of $0.87 a share.
