The first recorded name of the cove was Eastern Point Harbour or Peggs Harbour in 1766. The village is likely named after Saint Margaret's Bay (Peggy being the nickname for Margaret), which Samuel de Champlain named after his mother Margarite. There has been much folklore created to explain the name. One story suggests the village may have been named after the wife of an early settler. The popular legend claims that the name came from the sole survivor of a shipwreck at Halibut Rock near the cove. Artist and resident William deGarthe said she was a young woman while others claim she was a little girl too young to remember her name and the family who adopted her called her Peggy. The young shipwreck survivor married a resident of the cove and became known as "Peggy of the Cove" attracting visitors from around the bay who eventually named the village, Peggy's Cove, after her nickname.
The village was formally founded in 1811 when the Province of Nova Scotia issued a land grant of more than 800 acres (3.2 km²) to six families of German descent. The settlers relied on fishing as the mainstay of their economy but also farmed where the soil was fertile. They used surrounding lands to pasture cattle. In the early 1900s the population peaked at about 300. The community supported a schoolhouse, church, general store, lobster cannery and boats of all sizes that were nestled in the Cove.
Many artists and photographers flocked to Peggys Cove. As roads improved, the number of tourists increased. Today the population is smaller but Peggys Cove remains an active fishing village and a favourite tourist destination.
Roads and several homes were badly damaged at Peggys Cove in 2003 by the extensive flooding that accompanied Hurricane Juan which also damaged the cove's breakwater. The breakwater was further washed away by Hurricane Bill in 2009, allowing waves to seriously damage a home and gift shop, and washed away one of the cove's characteristic wooden fish
