I have owned Bank of Nova Scotia (BNS 0.72%) for a number of years now. In fact, I recently added to my position in the Canadian financial giant. Here are the big things I'm watching with this high-yield dividend stock and why I'm positive enough about the future to have bought more shares.
Bank of Nova Scotia dances to its own drummer
The core of Bank of Nova Scotia's business is its large Canadian banking operation. Scotiabank, as it is more commonly known, is one of a handful of Canadian giants that, basically, have protected positions in the market because of the country's strict regulatory regime. Canadian banking rules have also led to a generally conservative ethos at Scotiabank and its main rivals. Canada provides a solid business foundation.
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But Canada is a mature market and all of the major banks have looked outside the country for growth. Most chose to expand South in the United States. Scotiabank chose to largely skip the U.S. market and focus on Central and South America. That plan, while clearly differentiating the business, didn't work out as well as hoped. Management has now updated the approach, which is the first big thing I'm watching.
Essentially, Scotiabank is exiting less desirable countries and refocusing around countries where it has better prospects. That includes a push to increase its U.S. exposure, which it jump-started by acquiring a nearly 15% stake in KeyCorp (KEY 0.41%). A few quick partnerships, meanwhile, have materially reduced its exposure to less desirable markets in Central and South America. The big goal right now is to create a business that spans from Mexico, through the United States, and on into Canada.
That's basically the three most important trading partners in the Americas. I'm comfortable with that plan and the changes are being executed quickly and well. However, the process isn't done yet, so I'm still watching the effort closely.
The big story is the return to dividend growth
That said, what got me to buy more of the stock was the dividend. I bought the stock before the big business overhaul. I was happy to stick it out through the revamp, but I wasn't really ready to buy more of the stock despite the well above bank average yield here. Notably, the average bank is yielding around 2.5% while bank of Nova Scotia's dividend yield is 5.7%. But when the overhaul was announced the company also announced that it was going to pause on dividend growth for an unspecified period of time.
It turned out that the bank made enough progress that dividend growth resumed fairly quickly. Essentially, the dividend was static in 2024 and started to be increased again in 2025. That's a blip, especially for a company that has paid dividends continuously since 1833. That said, I'm keeping my eye on the dividend here, too. If there's another pause it would clearly indicate that Scotiabank's business overhaul has hit a rough patch.
NYSE: BNS
Key Data Points
Which brings up the last big thing I am watching with Scotiabank. While the extensive business base in Canada serves as a solid foundation here that's nice to see, it also presents some potential risks. Canada's housing market has been fairly volatile, with some markets seeing huge home price increases and subsequent price declines. Higher interest rates also make mortgages with variable rates riskier for banks. I don't expect Canada's housing market to suddenly become a cesspool, like what happened in the U.S. market during the Great Recession, but I can't help but worry that it is a possibility.
I'm comfortable with Bank of Nova Scotia's huge yield
There are clearly risks with owning Scotiabank. However, I believe the lofty yield is ample compensation for those risks in what could be described as a fairly low-risk turnaround story. Given the fact that I recently bought more shares, I clearly think the news is positive here. But that doesn't mean I'm not keeping my eye on some key things, including that ongoing turnaround, the signal being provided by the board's dividend choices, and the bank's exposure to the housing market in Canada.
