Image source: Getty Images
Canadian stocks are worth lower multiples now than they were a year ago due to the macro environment with higher inflation and higher interest rates. Corporate earnings growth is pressured. Their growth projects are becoming less attractive. The purchasing power of consumers also decreased. Due to high inflation, the purchasing power of money has fallen significantly more than in the recent past.
Stupid Canadian investors can empower themselves to be in a no-loss scenario. First, make sure you have an emergency fund that covers at least three to six months of your living expenses. This emergency fund must be cash or cash equivalent.
Second, the money you invest should be in stocks for the long-term. This means that this money can be in the stock for three to five years if not longer. Third, be psychologically prepared for market volatility.
There are perks to investing in the highly uncertain stock market that has been in doldrums since it peaked in the first quarter of the year. You can select high quality stocks and buy them at bargain prices. Although the market is not at bargaining levels yet, goofy investors can start picking high-quality stocks to start building long-term positions.
This is an example of a strong TSX stock that is a bargain today!
BNS . stock
Bank of Nova Scotia (TSX: BNS) (NYSE: BNS) has been hit with more penalties than major Canadian banks in this market downturn. The core business in Canada is as solid as other banks. Therefore, it is under more pressure due to its other focus in Latin America. The latter’s loan losses may be higher in today’s environment.
The important thing is that at a high level, BNS is still making solid profits and will increase its earnings and dividends over time. Its 12-month overdue earnings have exceeded $10 billion. Its S&P credit rating is also A+.
Finally, it has strong earnings power and viability. At $69.88 per share at writing, the bank’s stock is trading at about 8.3 times earnings, which is an absolute bargain — a discount of more than 28% from the normal long-term valuation. Here’s a quick look at the 10-year dividend yield range.
BNS Dividend Yield data by YCharts
It is a good idea to buy stocks close to the upper end of the range. You get paid well while you wait for economic conditions to improve. BNS’s safe dividend yield of 5.9% makes the income stock very attractive.
BNS stock has increased its earnings per share (EPS) by 5.4% annually over the past decade. It should be able to achieve a stable long-term EPS growth rate of at least 5% over the next decade. Since the payout ratio is estimated at less than 50% this year, it could also increase its earnings by a similar rate.
The foolish investor’s takeaway
No matter which stocks you buy, investors need to be patient and convinced to hold their stock.
While there is a good chance that BNS stock will recover to higher levels over the next three years, it would be much safer if you only invested the extra money you don’t need for the next five years. In fact, some savvy investors focus on generating passive income and keep adding shares of high-quality dividend stocks whenever they show dividend returns at the end of the historical range.
If the bank’s stock could trade at its normal valuation within five years, investors would receive a total return of 15% per year — essentially doubling their investment.