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Wednesday, October 22, 2014

Invest and retire before you die - The Bank of Nova Scotia (BNS)

Have you ever wondered how an investment in a boring, blue chip company that pays dividends to share holders and periodically grows those dividends performs over long periods of time?

Welcome to the Invest and retire before you die series, where I explore the merits of long term investments in Canadian blue chip companies that pay and grow their dividends every year. I have seen these studies for American companies in the past and figured it would be nice for people to find something equivalent for Canadian ones. Notice that many Canadian blue chips companies are also listed in American exchanges and are therefore easily available to US investors.

Why dividend payers and growers?
Revenue that is distributed to share holders is the hard proof that money is flowing in the business. It is hard to argue with cash that is periodically paid out to shareholders. In addition to that, dividends that are increased every year show the confidence that the management of a company has in the future operations of the business to sustain the new pay outs. Management knows how negatively, future dividend cuts are perceived by investors. That's why, when dividends are increased, they better make sure they can sustain them, which shows confidence. Increasing a dividend shows that the business is not only functional but that there is potential for sales and revenues to keep growing going forward. 

Dividends are not only for old retirees but for anyone willing to make money as a long term investor. From 1930 to 2013 dividends were responsible for about 42% of Stock Markets returns.

An Investment in The Bank of Nova Scotia
Symbols: BNS.TO (Toronto Stock Exchange), BNS (New York Stock Exchange)

BNS is a diversified financial institution that offers a range of products and services, including retail, commercial, corporate and investment banking to more than 18.6 million customers in more than 50 countries around the world. Canada is known for its strong banking sector, consistently ranked among the safest in the world. Canadian banks did not need a government bailout during the 2008 financial crisis.

BNS declared its initial dividend on July 1, 1833, that is 181 years ago as of this writing and has never missed one payment. Think about the consistency of that track record in the middle of crises, wars, diseases, panics and all sorts of negativity during almost two centuries.

BNS is also the most geographically diversified of the Canadian banks with important presence in regions that are projected to grow faster than Canada in the upcoming years such as Latin America (countries like Mexico, Peru, Colombia and Chile). They are also present in the Caribbean and South East Asia.

How would a $10,000 investment in BNS have fared in the last two decades?
Data going back to August 1, 1995. That is 19.22 years as of this writing. Numbers reflected in Canadian Dollars.

A $10,000 investment in BNS on August 1, 1995 with dividends reinvested in the stock would have been worth $167,406 on October 17, 2014. That is an Average Annual Return of 15.75% in a period that includes the 2000 dot com bubble burst, 9-11 terrorist attacks, Wars, the 2008 market correction (second worst in history), the 2011 debt ceiling issues in the US, the European debt debacle. Your initial investment would have been multiplied 16 times. You would own 2470 shares at the end of the period, each one of them paying you $2.64 a year in dividends for a total passive income of $6,520 per year.

Comparison of an investment in BNS vs an investment in the S&P500 index
But what if instead of buying once and forgetting you decided to contribute with additional purchases every year? What if instead of purchasing $10,000 worth of stock once, you decided to invest $5,000 every year?

Had you invested $5000 every year in BNS and reinvested all the dividends along the way, your investment would be worth around $579,314 and you would be the proud owner of around 8619 shares of stock that would be paying you $22,754 every year in the form of dividends. Dividends that are favorably taxed in respect with normal income a.k.a salary. Dividends that provide you with cash flow without selling your shares, without giving away your ownership on the company.

A long term investment in BNS was a life changer and it could very well be going forward. Would you take the plunge? In full disclosure, I already did. I own 67 shares of BNS as you can see in my long term investment portfolio.

Related Articles:
Chapter 1 - Invest and retire before you die - The Bank of Nova Scotia (BNS)
Chapter 2 - Invest and retire before you die - Emera Inc (EMA)
Chapter 3 - Invest and retire before you die - RioCan Real Estate (REI.UN)
Chapter 4 - Invest and retire before you die - Potash Corp. of Saskatchewan (POT)
Chapter 5 - Invest and retire before you die - Enbridge (ENB)
Chapter 6 - Invest and retire before you die - TransCanada Corporation (TRP)
Chapter 7 - Invest and retire before you die - Suncor Energy (SU)
Chapter 8 - Invest and retire before you die - Toronto-Dominion Bank (TD)
Chapter 9 - Invest and retire before you die - Telus Corporation (T)
Chapter 10 - A basic Dividend Growth oriented Canadian Investment Portfolio

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