The Dividend Dream: 6.84% Returns to Fuel Your Income Goals

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Dividend investing is a proven strategy to meet long-term financial goals, if not build enormous wealth. Canadians can turn to the TSX and invest in dividend-paying stocks. Many domestic companies have been sharing a portion of their profits for years. However, to fuel your income goals, consider taking a position in Bank of Nova Scotia (TSX:BNS).

Besides its 191-year dividend track record, BNS is a dividend dream. The dividend offer is a lucrative 6.84%, the highest yield among the Big Six banks. Moreover, the current yield is higher than the 4.9% industry average and is also in the top 25% of dividend payers in Canada. As of this writing, the share price is $62.02.

Earning potential

For illustration purposes, 1,000 BNS shares ($62,020 investment) will generate $4,242.17 annually. Since the payout is quarterly, your investment income every three months is $1,060.54. However, if you don’t pocket the dividends and reinvest them every time, your money will more than double to $126,416.93 in 10.5 years.

A better approach is to buy BNS shares and hold them in a tax-advantaged or tax-sheltered investment account. You can maximize the power of compounding in a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) because money growth is tax-free.

Bedrock of stability

Canada’s banking system is a model of stability, although the Big Bank stocks underperformed in 2023 due to the rapid rise in interest rates. The Office of the Superintendent of Financial Institutions (OSFI), the country’s financial regulator, monitors these giant lenders.

The OFSI pegged the domestic stability buffer (DSB) at 3.5% in December 2023 to ensure they remain resilient in a market downturn. It means the banks’ common equity tier-one ratio (CET1 ratio) must be at least 11.5%.

With its $75.3 billion market capitalization, BNS is Canada’s fourth-largest bank. Last year, its 13% CET1 capital ratio was the third-highest after Royal Bank of Canada and Toronto-Dominion Bank. Like its industry peers, BNS is ready for any eventuality.

In fiscal 2023 (12 months ending October 31, 2023), total revenue increased 2.8% year over year to $32.3 billion. However, net income fell 26% to $7.5 billion versus fiscal 2022. The reason was the 147.6% jump in provision for credit losses to $3.4 billion. Its president and chief executive officer, Scott Thomson, said BNS is focused on strengthening the balance sheet.

Furthermore, Thomson said the strong capital and liquidity ratios, improving loan-to-deposit ratios and higher PCL position BNS for the next phase of its growth strategy.

Worry-free investors

Existing and prospective BNS investors should be worry-free regarding the safety and sustainability of dividend payments. The big bank stock is a Grade-A investment due to meaningful revenues ($30 billion on average) and high-quality earnings every year. It carries a Dividend Aristocrat status owing to 12 consecutive years of dividend increases.  Â

Market analysts predict revenue and earnings to grow by 8.1% and 7.8%. But with recession fears almost gone and interest rate cuts imminent, the financial sector, including big banks, should be big winners in 2024. Lastly, BNS’s total return in 51.13 years is an astronomical 161,679.87%. Â

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* Returns as of 12/22/23

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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.