Guest Post: Why Sure Dividend Recommends Value and Dividend Investing

The following article was written by Bob Ciura at Sure Dividend. While my blog posts normally focus on the importance of creating low volatile portfolios, dividend growth investing has proven to be a successful way to not only reduce your total risk but provide you with a consistent stream of income that will last a lifetime. Sure Dividend focuses on such a strategy and as such, I thought it would be a perfect complement to this blog. I hope you enjoy this special post!

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Why Sure Dividend Recommends Value and Dividend Investing

While there are several thousand stocks that investors could purchase, in general all stocks tend to fall into one of three groups—growth stocks, value stocks, and dividend stocks. As the name suggests, growth stocks typically offer potential for outsized capital gains due to their high levels of growth. But growth stocks also usually have extremely high stock valuations, and most do not pay dividends to shareholders. As a result, growth stocks can be very risky, particularly during recessions.

At Sure Dividend, we believe value and dividend stocks offer the strongest risk-adjusted return potential. While our research typically focuses on dividend stocks with above-average dividend yields, in our view the best stocks offer a combination of value and dividends. We feel high-quality dividend growth stocks, such as the Dividend Aristocrats, can generate superior long-term returns, particularly if investors purchase them at low valuations.

This article will provide an overview of Sure Dividend’s investment philosophy, as well as an example of a stock we view attractively on the basis of both its valuation and high dividend payout.

Why Invest in Value and Dividend Stocks?

Legendary investor Warren Buffett, one of the richest people in the world, is perhaps the most well-known value investor in the world. Buffett’s investment philosophy is straightforward—he purchases quality businesses that are temporarily trading below their “intrinsic value”, or their real worth. We apply the same basic methodology to our investing style, with the addition that we focus on stocks that pay dividends to shareholders.

Specifically, we recommend investors conduct further research on the Dividend Aristocrats, a group of 66 stocks in the S&P 500 Index that have each raised their dividends for at least 25 consecutive years. The Dividend Aristocrats have maintained a long history of consecutive annual dividend growth, thanks to their industry-leading brands and competitive advantages.

Competitive advantages are particularly important—Warren Buffett popularized the term “economic moat” to describe the best companies to invest in for the long run. Similar to a moat surrounding a castle, protecting it from invasion, high-quality stocks like the Dividend Aristocrats operate in industries with high barriers to entry. This allows them to generate long-term growth without ceding market share to the competition.

Buying high-quality businesses such as the Dividend Aristocrats, and holding on for the long-term, is a proven method to generate strong total returns. For example, according to Standard & Poor’s, the Dividend Aristocrats have generated total annual returns of 13.21% per year in the trailing 10-year period ending May 30th. This performance slightly exceeded the performance of the broader market in the same time. By comparison, the S&P 500 Index generated total returns of 13.15% in the same 10-year period.

Plus, the Dividend Aristocrats had a significantly lower level of volatility than the S&P 500 Index. Measured by standard deviation, the most widely-used measure of stock market volatility, the Dividend Aristocrats had a standard deviation of 12.67%, compared with a standard deviation of 13.57% for the S&P 500 Index. Therefore, the Dividend Aristocrats generated better risk-adjusted returns than the S&P 500 Index over the past decade.

At Sure Dividend, we are big proponents of investing in high-quality dividend stocks. It is even better to buy strong dividend stocks when they are undervalued.

Bank of Nova Scotia: Compelling Valuation And Dividend

Bank of Nova Scotia (BNS), often referred to as Scotiabank, is the third-largest financial institution in Canada behind the Royal Bank of Canada (RY) and the Toronto-Dominion Bank (TD). Scotiabank is a diversified financial institution that provides a variety of financial services to businesses and consumers, including Canadian Banking, International Banking, Global Wealth Management, Global Banking & Markets, and more.

Bank of Nova Scotia continues to perform relatively well, even with the coronavirus crisis to start 2020. In the most recent quarter, earnings-per-share fell 40% to $1.00. The decline was due to higher loan loss provisions of C$1.85 billion, or $1.33 billion in U.S. dollars. BNS also reserved C$232 million related to government investigations into its metals business. Despite the weak quarter, Bank of Nova Scotia remains highly profitable, with a strong balance sheet. The Bank reported a Common Equity Tier 1 capital ratio of 10.9% and a liquidity coverage ratio of 132% for the quarter.

While 2020 is likely to be challenging for the entire financial sector, due to the coronavirus as well as low interest rates, BNS has positive long-term growth potential. While other banks have focused on expanding into the United States, Scotiabank’s future growth should come primarily from its rapidly-expanding International Banking segment, which provides banking services in emerging economies like Mexico, Peru, Chile, and Colombia. These markets are appealing because net interest margins there are significantly higher and their longer-term economic growth is also higher.

Bank of Nova Scotia pays a quarterly dividend of $0.90 in Canadian dollars. On an annualized basis, the dividend of $3.60 in Canadian dollars translates to approximately $2.68 per share in U.S. dollars. With a recent share price of ~$45 per share, the stock has a high dividend yield of nearly 6%. This makes BNS stock very attractive for income investors, as the S&P 500 Index on average yields just 2%. In an environment of low interest rates, it is not easy to find safe 6% yields, which makes BNS quite appealing for income.

The stock is also attractive on a valuation basis. Analysts currently expect Bank of Nova Scotia to report earnings-per-share of $3.83 for fiscal 2020. Based on the consensus EPS estimate, Bank of Nova Scotia stock trades for a price-to-earnings ratio just below 12x. This is a relatively low valuation multiple considering the company is highly profitable, with a long track record of growth and a high dividend yield. In our view, the combination of a low valuation multiple, future earnings growth, and the ~6% dividend yield could generate strong total returns above 10% per year, through a rising share price and dividends.

Final Thoughts

During bull markets, it is tempting for investors to throw caution to the wind and purchase only growth stocks. But investors should remember that while growth stocks typically outperform in bull markets, they also tend to underperform in recessions due to their highly cyclical business models. For risk-averse investors such as retirees, the focus should be on quality stocks.

Applying value investing principles can help investors stick with high-quality businesses trading at a discount to their intrinsic values. As a bonus, many quality value stocks also pay high dividend yields to shareholders. High levels of dividend income help provide shareholders with real cash that they can live on, which is especially valuable for retirees.

For all these reasons, Sure Dividend recommends long-term investors buy and hold high-quality dividend stocks trading at attractive valuations, such as Bank of Nova Scotia and many others. To learn more, consider one of Sure Dividend’s two monthly newsletters, which you can read about here.

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Special thanks again to Bob Ciura for this post! For further reading and listening, I suggest that everyone check out this podcast where Bob discusses his views on why dividend investing works, his preferred method of analyzing stocks (bottom-up, company-focused approach), and why certain fundamental metrics can paint a useful picture for some industries but not others. Thanks Bob!