I'm a dividend investor through and through, so buying a U.S. bank after living through the pain of the Great Recession is not something I'm about to do (far too many U.S. banks ended up cutting their dividends). But Canadian banks, which largely sailed through that volatile time without much impact to their dividends, are a completely different story.
On what appears to be the eve of another economic downturn, here are four reasons why I added Bank of Nova Scotia (BNS 0.43%) to my portfolio.
1. Bank of Nova Scotia is conservative by design
Canadian banking regulation is far more stringent than regulation in the United States. That basically insulated the largest banks from competition. That means that big names like Bank of Nova Scotia, or Scotiabank as most people call it, are unlikely to be unseated by upstarts in their home markets. Mergers among the biggest players are also not likely to be approved, so Scotiabank has a very solid foundation in Canada that appears well protected.
Image source: Getty Images.
This conservativeness is kind of ingrained at Canadian banks, too. They tend to take a longer-term view of their investments, and generally don't put as much on the line when they do make decisions. This was clearly on display when some of the largest and most iconic U.S. banks cut their dividends during the Great Recession -- but Canadian banks, by and large, didn't. Regulators said they couldn't increase dividends, erring on the conservative side as usual, but that's hardly a knock against the banks. Dividends have since started to increase again.
2. Scotiabank has a wonderful streak
I tend to favor companies that increase their dividends annually, like Dividend Aristocrats. We already know that regulators made sure that Canadian banks couldn't claim such a streak, but that doesn't mean Scotiabank doesn't have anything to crow about on the dividend front. For starters, the dividend has been increased in 43 of the last 45 years. And, even more impressive, a dividend has been paid every year since dividend payments started being paid out on July 1, 1833. That date is not a typo. That's a dividend record that is hard to complain about.
3. Scotiabank offers a different type of exposure
Many years ago I bought stock in TD Bank (TD 0.61%), so I already have banking exposure in Canada and in the U.S. market. I was a little reluctant to take on another Canadian bank. But Scotiabank changes things up in an important way geographically. While most of its peers have focused on North America, Scotiabank gets around half of its earnings from Canada and the rest from South American markets, including Mexico, Chile, Peru, and Columbia. These emerging markets should, over time, have higher growth rates than the United States, a developed market that tends to grow slowly.
While Scotiabank does some business in the United States, it is important to note that its South American business is not small. It is No. 3 in both Peru and Chile, No. 5 in Mexico, and No. 6 in Columbia. It is clearly a major player where it operates -- it holds the No. 3 slot in Canada as well. I thought that was a nice compliment to TD, which is basically a Canadian and U.S. bank, giving me exposure to all of the Americas. I recognize that I've doubled up on Canada, but given that banking sector's conservative nature, I'm OK with that.
4. Bank of Nova Scotia has a nice yield
I would be lying if I said dividend yield played no role in my decision. Scotiabank's yield is a generous 6.2%. That also happens to be historically high for the bank, suggesting that it is trading at bargain prices today. There's clearly a reason for this, given the concerns about interest rate increases pushing the global economy into a recession, but I'm OK with that industry-wide risk given the banks long and successful history. In fact, the opportunity to collect such an attractive yield wouldn't exist without that risk, so I see this as a bit of a contrarian investment.
BNS Dividend Yield data by YCharts
It isn't easy buying when others are selling, and the stock price is down 30% so far in 2022. Indeed, I watched the stock for months before actually pulling the trigger, working to get emotionally comfortable with the risks I was taking on. But when the stock price took a turn for the worse recently, and the yield popped up, I decided it was better to be roughly right than wait for the "perfect" time and miss the opportunity completely.
Going for a long-term hold
Like TD Bank, my plan is to pass Scotiabank shares on to my daughter when I eventually die. So unless something material changes at the bank, I'm in for the long haul. And I'll happily collect the fat yield from a uniquely positioned bank with a solid core market and a heavy focus on growing emerging markets. If that sounds like a good plan to you, you might want to join me in the investment. Eventually, the economy will turn higher again and the chance may slip through your fingers.
