Written by Kay Ng at The Motley Fool Canada
The sky falls Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or so it seems. BNS stock was the worst-performing Canadian Big Six bank stock year-to-date. Notably, it’s down nearly 27% as of this writing, compared to the average 10.5% decline of its peers.
The market obviously doesn’t agree with me, but I would pick BNS stock as one of the best TSX Buying banking stocks for passive income alone. Of course, it’s also an undervalued stock. This is not a question.
At $65.58 per share, BNS stock trades at about 7.8 times earnings, a cheap valuation characteristic of recessionary times. This could indicate that the market has a negative outlook on the bank’s focus on Pacific Alliance countries, despite its core business being based in Canada, like its peers.
Unlike the US, which has technically entered a recession with two consecutive quarters of decline in gross domestic product, Canada isn’t there yet. However, we may not be too far behind as Canada is also experiencing an inverted yield curve – an indicator that tends to precede recessions.
The bottom line in these uncertain times is that BNS stock’s dividend is safe. The payout ratio for the trailing 12 months (TTM) is 49% of net income to common shareholders. When the bank has seen earnings fall during recessions in the past, it has always maintained its dividend.
Mind you, during highly uncertain economic times, the regulator — the Office of the Superintendent of Financial Institutions — restricts BNS stock and its peers from increasing dividends and buying back shares. This serves as a precautionary measure to maintain a sound Canadian financial system.
BNS stock’s low valuation has boosted its dividend yield to nearly 6.3%, which is extremely attractive. If the stock’s valuation normalizes, it could deliver an impressive total return at a compound annual growth rate (CAGR) of about 16% over the next five years. That return would double investors’ money under the Rule of 72 in about 4.5 years.
A top-tier TSX bank stock that is the most resilient
In contrast to the underperforming BNS stock Royal Bank of Canada (TSX:RY)(NYSE:RY) stock was the most resilient. RBC stock is down just 6.6% year-to-date! This shouldn’t come as a surprise considering that this is a diversified bank that has the largest market cap among its peers.
RBC operates in 29 countries. It is also diversified across different business segments. Revenue diversification in 2021 was as follows: 37% in personal and corporate banking, 27% in wealth management, 21% in capital markets and 11% in insurance.
Right now, at $125.45 per share, investors aren’t getting a huge discount for RBC stock. However, risk-averse investors will have peace of mind by holding these high-quality and resilient stocks. The top bank stock also offers a secure yield of just under 4.1%. Its TTM payout ratio is 43% of its net income to common shareholders.
The foolish takeaway investor
So there you have it! Patient investors can buy BNS shares in October at a +30% discount to their usual long-term valuation and enjoy a +6% return. Alternatively, RBC stock is the bank stock of choice for investors looking for stability and premium quality.
The 2 Top TSX Bank Stocks to Buy in October post appeared first on The Motley Fool Canada.
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Stupid contributor Kay Ng has a position at BANK OF NOVA SCOTIA. The Motley Fool recommends BANK OF NOVA SCOTIA. The Motley Fool has a disclosure policy.