1 Cheap Dividend Stock for $3,000 in Annual Dividend Income

The large Canadian banks have delivered massive wealth for long-term shareholders. Compared to their counterparts south of the border, the big banks of Canada are far more conservative, limiting their growth in the process. But it also allows TSX banks to enjoy well-capitalized balance sheets across market cycles.

Several U.S. banks were forced to reduce and even suspend dividends during the financial crisis of 2008. But due to their healthy financials, the big TSX banks could easily maintain dividends providing investors with a steady stream of passive income.

In the last 15 months, federal banks around the world have increased interest rates to counter elevated inflation levels. The double whammy of inflation and the rising cost of debt have lowered consumer spending levels and the demand for loans, acting as headwinds for the banking sector. But it also helps banks to benefit from higher profit margins in the near term.

A weak macro environment has dragged the valuations of TSX bank stocks lower in recent months. However, the pullback allows shareholders to enjoy higher dividend yields and benefit from outsized gains when markets recover.

Here is one such cheap TSX bank stock you can buy right now.

Is BNS stock a buy or a sell?

Valued at a market cap of $80 billion, Bank of Nova Scotia (TSX:BNS) stock is trading 30% below all-time highs. It is the only bank with operations in Canada, the U.S., and the Pacific Alliance countries (PACs). Basically, the PAC consists of Mexico, Chile, Columbia, and Peru: a regional block created in 2011 to facilitate the free movement of goods, services, capital, and people.

Compared to the U.S. and Canada, the PACs are faster-growing economies with favourable demographics and pro-business policies. With a total population of 230 million, the PACs are cumulatively the sixth largest economy globally.

Bank of Nova Scotia is a top three bank in Canada, Peru, and Chile. It is also a top-five bank in Mexico and a top-six bank in Colombia.

In the fiscal second quarter (Q2) of 2023 (ended in April), BNS reported a net income of $2.17 billion or $1.70 per share, compared to the year-ago net income of $2.75 million, or $2.18 per share. The drawdown can be attributed to higher provision for credit losses or PCLs in the quarter.

But BNS continues to build its liquidity position, as customer deposits grew by double-digit percentages year over year. Its liquidity coverage ratio also improved to 131% compared to 122% in the prior-year period.

Priced at nine times forward earnings, BNS stock is very cheap, given its dividend yield of 6.4%. Despite the cyclical nature of the banking sector, BNS has increased dividends at an annual rate of 8.2% annually in the last 20 years. In addition to its tasty dividend, BNS stock trades at a discount of 6% to consensus price target estimates.

The Foolish takeaway

For you to earn $3,000 in annual dividend income, you need to buy 708 shares of the company worth $46,728 today. If BNS increases its dividends by 7% annually, your annual payout should double to $6,000 by the end of 10 years.

But investing such as huge sum in a single stock carries significant risk. You need to diversify your portfolio by identifying several other blue-chip TSX stocks with strong balance sheets and rising dividend payouts.