Right now, I’m all about finding defensive dividend stocks with incredible long-term growth potential. Finding such stocks which are trading at valuations that are historically attractive — that’s next level.
There are plenty of undervalued dividend stocks to choose from, but I think Bank of Nova Scotia (TSX:BNS) could be among the best such picks in the market. Trading around 10% below its recent 52-week high, this is a stock I think provides not only significant capital appreciation potential over time but also a whopping 4.4% dividend yield to boot.
Let’s dive into why this stock is worth buying and holding on this dip, in my view.
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Solid dividend supported by robust fundamentals
This 4.4% dividend yield Scotiabank offers is the best of its large-cap peers. Indeed, on that front alone, I think investors have a solid rationale to consider adding exposure to this name.
That said, there’s also a solid fundamental story to explore with this top-tier Canadian bank. With strong Q4 results showcasing earnings per share (EPS) of $1.93 on nearly $10 billion in revenue, there’s a lot to like. However, what I think could be even more impressive is the bank’s return on equity and net margins of 10.5% and 14.5%, respectively. These numbers underscore strong franchise strength across Scotiabank’s North American footprint.
With annual dividend growth coming in around the high-single-digit range over the past decade (and plenty of experts suggesting such growth can continue for a very long time, given Scotiabank’s cash flow growth profile), there’s a lot to like about both the capital appreciation and dividend growth potential of this stock long term.
Don’t forget about its valuation
Scotiabank’s earnings and cash flow growth profile are robust, as is its existing dividend yield. That said, I think there’s also something to be said about this bank’s valuation, which is also among the cheapest of its peers (and very cheap on a relative basis to where market multiples are right now).
At a forward price-to-earnings multiple of 12.3 times, and trading at just 1.5 times book, this is a stock that (in my opinion) should be trading at a much higher level. That is, if the market valued Scotiabank’s top-tier capital position and long-term growth prospects correctly.
Of course, financial stocks can be impacted from time to time by market-wide selloffs. Financial crises and other market shocks can impact this sector more acutely than others. Indeed, we could be headed into such a period at some point this year.
That said, I’m also of the view that those looking to bet on long-term economic growth have a great option to consider in Scotiabank from both a dividend and growth standpoint. This is still one of my top buy-and-hold picks for investors in the market today.