One of the critiques of the amazing stock market rally this year is that it’s led by a narrow selection of stocks and not broad-based.
If those market-leading tech and health-care stocks falter, the big stock indexes could fall hard. But there’s a positive side to having a portion of the stock market underperforming. Buried within soaring stock indexes are underperforming stocks that offer a buy-low opportunity.
You can sniff out some of these stocks by looking at dividend yields. I keep track of the yields on blue chips using the Watchlist feature on Globeinvestor.com and recently found four big names with yields above 6 per cent. Enbridge Inc. (ENB-T) was at 7.7 per cent, Power Corp. of Canada (POW-T) at 6.7 per cent, Canadian Natural Resources Ltd. (CNQ-T) at 6.6 per cent and Bank of Nova Scotia (BNS) at 6.4 per cent.
A 6-per-cent yield is a turn-off if you’re risk-averse. Yields only get that high when investors are dumping a stock for reasons that typically include at least a trace of concern about a dividend cut. But if you can find a solid dividend-payer with a high yield, you have a chance to lock in a yield that soars above most of what’s available in bonds, guaranteed investment certificates, preferred shares and common shares, too.
Of the four stocks listed above, Bank of Nova Scotia stands out as being worth a look to see whether it meets your investing needs. Banks are most conspicuous among the stocks that didn’t fully participate in the rally back from the lows of March. In that group of laggards, Scotiabank brings up the rear. It has the worst 52-week loss and the highest dividend yield.
Consider Scotiabank for dividend income, rather than near-term capital gains. It may take a while for it to exit the banking doghouse because of concerns about its Latin American operations and loan losses at home.
As for that dividend, Scotiabank has a similar dividend payout ratio to other big banks. Don’t dismiss the potential for a dividend cut entirely, though. It’s true that banks held the line on dividends back in the 2008-09 financial crisis, which hammered the banking sector globally. But the pandemic may yet test banks if it brings a second wave that forces retail and business clients to default on loans in large numbers.
Be ultra-cautious when considering stocks with a 6 per cent yield, which is a sign of things gone wrong. Scotiabank is one case where the risk might be worth it.