Better Income Play: GICs or Bank Stock Dividends?

money cash dividends

Since 2022, the Bank of Canada has increased the policy interest rate to 5%, making Guaranteed Investment Certificates (GICs) more attractive to investors seeking income. GICs make sense if you need your cash back in the short term, because they provide a principal-back guarantee plus decent interest income today. For your reference, the best one-year GIC interest rate is about 5.95%. Typically, you can find GICs that mature in one to five years, but there are ones that last for three months, for example. Usually, the shorter the term, the lower the interest rate.

If current income is your priority, long-term capital could do better in big dividend bank stocks like Bank of Nova Scotia (TSX:BNS). The bank offers more income than GICs. Moreover, it pays out eligible Canadian dividends that are taxed at a lower income tax rate because of the dividend tax credit (if your investment is held in a non-registered account).

According to Statistics Canada, Canadians earn an average annual income of about $61,640 based on the average weekly earnings for January. Assuming you reside in British Columbia and earn the average annual income, earning an additional $10,000 in interest income in the non-registered account would result in an additional tax of $2,820 this year. If you earned $10,000 of additional eligible Canadian dividends instead, you would only be taxed $163. That would be a staggering tax savings of $2,657!

Of course, investors need to understand that bank stocks are riskier investments than GICs. So, investors would need to endure stock volatility and bear the business risk. In the worst-case scenario, a stock could go to $0, and the investor could be left with nothing. However, that’s certainly not expected of the big Canadian banks that are viewed as solid, blue-chip, long-term investments. Stock investors should also have an idea about the dividend safety, business outlook, and stock valuation, for example.

Bank of Nova Scotia stock

Bank of Nova Scotia has been quoted as Canada’s most international bank. Other than making core earnings in Canada, more than 40% of its operations are international, including in Mexico, Peru, Colombia, and Chile.

The international operations could potentially lead to higher growth in the longer term, but in the near to medium term, these riskier geographies could continue to weigh on the stock. It could take several years for the new chief executive officer, Scott Thomson, to steer the ship in the right direction.

Along with Canadian Imperial Bank of Commerce, BNS stock has been the worst-performing big Canadian bank stock in the last 12 months, falling by close to 16%. Consequently, at $62.79 per share, BNS stock offers a dividend yield of close to 6.8%. Although higher than normal at about 50%, its payout ratio is expected to be sustainable at about 63% this fiscal year.

Investor takeaway

Over the next 12 months, BNS stock is expected to continue to be weak, but its dividend is safe. So, essentially, investors get paid to wait for price appreciation. Notably, the bank will be reporting its quarterly earnings this week. So, investors could wait and see before deciding on what to do. Chances are, if you’re seeking income for your long-term capital, it is a good buy here.

The post Better Income Play: GICs or Bank Stock Dividends? appeared first on The Motley Fool Canada.

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Fool contributor Kay Ng has positions in Bank Of Nova Scotia and Canadian Imperial Bank of Commerce. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.