Yahoo Finance Better Dividend Buy: Bank of Nova Scotia or Fortis?
Written by Andrew Walker at The Motley Fool Canada
Bank of Nova Scotia (TSX:BNS) looks cheap today and offers a high yield. Fortis (TSX:FTS) continues to recover from the market correction and is providing solid guidance for dividend growth. Investors seeking top TSX dividend stocks for portfolios focused on passive income and total returns are wondering which stock is good to buy right now.
Bank of Nova Scotia
Bank of Nova Scotia is Canada’s fourth-largest bank based on its current market capitalization near $80 billion. The stock is down more than 20% in the past 12 months and 15% below its price at this time five years ago.
The long-term underperformance might be one reason the board brought in a new chief executive officer (CEO) this year to try to turn things around to improve returns for investors. In the near term, the bank will likely focus on shoring up the balance sheet to ride out the potential recession that analysts expect to occur later this year or in 2024.
The Bank of Canada’s steep rate increases in the past year are designed to cool off the economy and bring balance to an overheated jobs market as a means of getting inflation under control. The concern is that the rate hikes have been too aggressive and will eventually tip the economy into a meaningful slump.
All the Canadian banks have large residential mortgage portfolios that could come under pressure if rates stay high for too long and borrowers begin to default on a large scale. If panic selling hits the housing market, prices could plunge and leave the banks stuck with properties that are worth less than the amount owed on the mortgages.
This is a worst-case scenario that is unlikely to materialize, but investors need to keep it in mind when evaluating bank stocks.
Bank of Nova Scotia also has a large international business with operations primarily located in Mexico, Peru, Chile, and Colombia. In the event there is a deep global recession, these economies could take a big hit, as they did during the pandemic.
Despite the near-term risks and uncertainties, contrarian investors might want to consider adding Bank of Nova Scotia to their portfolios while the stock is out of favour. The new CEO is expected to restructure the bank after completing a strategic review. This could help boost the stock price in the next few years.
In the meantime, investors can collect a 6.1% dividend yield while they wait for the recovery.
Fortis
Fortis owns power-generation facilities, electricity transmission networks, and natural gas distribution utilities. The company gets 99% of its revenue from regulated assets that provide essential services needed by businesses and households, regardless of the state of the economy.
As such, Fortis should be a good stock to own during an economic downturn.
The $22.3 billion capital program is expected to boost the rate base by about 6% per year on average through 2027. This should support the board’s planned annual dividend increases of at least 4% over the next five years. That’s good guidance in a challenging economic climate.
Fortis raised the dividend in each of the past 49 years.
The stock is up 20% from the low last fall and the dividend yield is down to about 3.75% right now, so the easy money has already been made.
Is one a better pick today?
Bank of Nova Scotia looks cheap at just 9.3 times trailing earnings and the dividend should be safe. If you can handle the potential volatility over the next 12-18 months, the stock could be an interesting pick right now for contrarian investors seeking passive income and a shot at decent capital gains.
Fortis is probably the safer bet. Although the current dividend yield is low the planned dividend growth over the next few years will improve the yield on the initial investment. It’s tough to ignore a stock with nearly 50 years of annual dividend growth.
The post Better Dividend Buy: Bank of Nova Scotia or Fortis? appeared first on The Motley Fool Canada.
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The Motley Fool recommends Bank Of Nova Scotia and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.
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