About my last article discussing Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) as a high-yield stock, some readers gave feedback about the fact that rising interest rates are negative for utilities like Algonquin that have high debt levels because of the nature of their businesses. Rising interest rates imply that their borrowing costs are going to increase, which can dampen their growth.
In contrast to utilities, banks are expected to benefit from rising interest rates. Currently, the highest-yield Big Six Canadian Bank is Bank of Nova Scotia (TSX:BNS)(NYSE:BNS). It yields 4.3% at writing.
Just like its big Canadian bank peers, BNS stock did not cut its dividend through the last two recessions. It did freeze its dividend periodically (like its peers) because of restrictions from the regulatory body, the Office of the Superintendent of Financial Institutions (OSFI), in Canada.
The OSFI restricted federally-regulated financial institutions from raising their dividends during those highly uncertain economic times — the global financial crisis of 2007-2009 and the COVID-19 pandemic of 2020. Insurance stocks like Sun Life (TSX:SLF)(NYSE:SLF) and Manulife (TSX:MFC)(NYSE:MFC) also froze their dividends during the pandemic because of similar restrictions.
If you’re just looking for income, BNS offers a decent yield. However, based on BNS’s yield history, the valuation of the dividend stock appears to be fully valued. (We can use the yield history of companies that pay stable dividends as a gauge for stocks’ valuations.)
BNS Dividend Yield data by YCharts
On a price-to-book basis, the stock has room to appreciate about 15% before reaching a multiple of two. Bank of Nova Scotia stock appears to be trading at a price-to-earnings ratio that’s in the middle of the range. The general analyst consensus is that the stock is fairly valued.
BNS Price to Book Value data by YCharts
So, stockholders of BNS stock with an investment horizon of three to five years could expect total returns of about 7-10% per year, including earning a safe yield of 4.3% for starters.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: As of writing, we own shares of Algonquin and Manulife.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
Get Exclusive Articles from me on Seeking Alpha
- Access my portfolio of high-quality U.S. and Canadian dividend stocks.
- Real-time updates of when I buy or sell from this portfolio.
- Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.