The rebound of U.S stocks from their March lows to now just off their all-time highs has been the fastest since 1933. The S&P 500 alone has gained over 51% since the pandemic induced sell-off which saw a 20% crash in March. Despite a recent pullback, the stock market has had a powerful uptrend that has been fuelled by a combination of consistent support from the FED and positive earnings reports that beat expectations, thus creating a considerable amount of hype and hysteria that is fuelling the even larger tech stock rally. Tech Companies such as Amazon (NASDAQ: AMZN) have increased by 76%, Facebook (NASDAQ: FB) by 72% and of course Tesla (NASDAQ: TSLA) by 513% since March. With this enormous rally in U.S equities, investors can be easily distracted by the high returns and be quick to turn their back on slower-growing yet high yielding dividend stocks such Direct Line Insurance Group (LON: DLG) or The Bank of Nova Scotia (NYSE: BNS).
It is beyond dispute that Direct Line Insurance Group and The Bank of Nova Scotia, do not command and possess the current levels of attention and high percentage gains of big tech companies such as Tesla and Amazon. However, they also do not possess the same high levels of volatility which is an important factor to consider, especially during times with such uncertainty surrounding second wave fears of COVID-19, upcoming U.S elections and the global economy. Although there is no individual company that is entirely unaffected by current events, DLG and BNS do not stand in a vulnerable position of being severely impacted by the many different threats that have taken a toll on many businesses. This is primarily due to their strong financials and there still being a future for growth in both their respective industries.
This is not the case, however, for other high yielding companies such as Altria (NYSE: MO), offering an 8.24% dividend yield or Exxon Mobil (NYSE: XOM), offering a 9.2% dividend yield. Investors may be tempted by the extremely high dividend yields offered by both Altria and Exxon Mobil, but they must take into account the limited future growth potential and its impact on both companies stock price. As a result of increasing regulation on the fuel and tobacco industry and a shift in global consensus, the business models of Altria and Exxon Mobil are in jeopardy. The limited future prospects for Altria and Exxon Mobil have clearly been reflected by the gradual down-trending stock price of both companies over the past 5 years. On the contrary, there is no doubt that the business models of Direct Line Insurance Group and The Bank of Nova Scotia, which are an integral part of the economy, will be present over the next 20 to 30 years. Therefore, even though the dividend yield of Direct Line Insurance Group and The Bank of Nova Scotia, is not as high as other companies such as Altria or Exxon Mobil, there is a lot less risk of losses from falls in stock price that can occur either very quickly or slowly over time.
Whilst the Direct Line Insurance Group, offering a dividend yield of 7.26%, and The Bank of Nova Scotia, offering a dividend yield of 6.52% are in different industries, one insurance the other financial services, they both offer a generously high dividend yield but crucially at the same time being fundamentally strong companies. For instance, the market capitalization of Direct Line Insurance Group may seem small at around $4.2 billion, however, their revenue last year was $3.31 billion, with a net income standing at $419.9 million which clearly shows their profitability and capability to pay this high dividend yield. Furthermore, the dividend payout ratio stands at a moderate 51.55% which although is an indicator the company is reaching maturity, in comparison to competitors such as Legal & General Group plc, whose payout ratio is 84.46%, it shows that they have a considerably larger amount of capital for reinvestment and further growth. One must also take into account the consistency of the dividend yield based on DLG’s dividend history which has been consistently and steadily increasing over the past 5 years from 3.40% in 2015.
Similarly, The Bank of Nova Scotia’s attractive dividend yield of 6.52% has been remarkably consistent over the past 5 years with a 2.16% increase since 2015. It is even more impressive in the case of The Bank of Nova Scotia as it is valued 10 times more than Direct Line Insurance Group, with a market capitalization topping over $50 billion dollars making it the 3rd largest Canadian Bank. Additionally, their annual revenue from last year was over $22 billion, and much like their dividend, it has been increasing steadily by around $1.25 billion dollars each year from the past 5 years. This is sufficient evidence to indicate that there is no sign the dividend will be cut, which has already affected other high dividend-yielding banks such as Wells Fargo (NYSE: WFC) who cut their dividend by 80%. Furthermore, The Bank of Nova Scotia’s payout ratio of 53.25% is also another sign proving that despite reaching a high level of maturity it still has enough capital for further growth.
In conclusion, Direct Line Insurance Group and The Bank of Nova Scotia’s dividend yield is far from likely to be reduced in the long term based on their healthy earnings and dividend history. At the same time, both companies have enough capital and potential to further grow to add more value to their companies, which would thus increase their stock price. Even though the capital gains and dividend yields received from these two companies, even combined, would not outperform the current return of major tech companies, which not to mention are trading at questionably overvalued prices, they do provide a low risk and low volatile investment opportunity, especially in such uncertain times, into solid and healthy businesses that will remain for the long term.
The Sweeney Club 