Which Has the Better Dividend: Royal Bank of Canada or Toronto-Dominion Bank?

Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are two of Canada’s favourite dividend stocks. Which is better?

| More on:

Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are Canada’s two largest companies and two of the country’s most popular dividend stocks. But which one is the better payout?

The case for RBC

RBC’s dividend currently stands at 81 cents per share, per quarter, good enough for a 4.3% yield. Meanwhile, TD’s 55 cent dividend yields just under 4%.

And it’s not as if RBC has such a risky payout. The bank has paid a dividend every year since 1870, and the payout has risen very consistently in recent year–by more than 8% annually over the past decade. RBC didn’t even have to cut its dividend during the financial crisis. Better yet, RBC pays out just under half of its net income to shareholders

RBC is also a cheaper stock than TD, trading at just over 11 times earnings, while TD trades at close to 13 times. And RBC generates higher returns, mainly because it exited the low-return U.S. retail banking market.

To top it all off, RBC is very well positioned to expand market share, especially in Europe, where banks have been slimming down for years. So shareholders should be able to count on even higher dividends in the years to come.

The case for TD

TD may have a lower dividend and slightly more expensive shares, but there are some good reasons for this.

First of all, TD has much less exposure to the energy sector than RBC. Likewise, TD has less exposure to Canada’s energy-producing regions. Meanwhile, the bank has an especially large focus in geographies that benefit from low oil prices, such as Ontario and the U.S. East Coast. This means that TD faces less risk of big loan write-offs.

There are other reasons to like TD’s U.S. exposure. The Federal Reserve is planning two interest rate hikes this year, which should improve lending margins. And the American economy is much healthier than Canada’s, which bodes well for future loan demand.

TD also has a fantastic track record of controlling risk, which has been the case ever since a disastrous year in 2002. This was a great benefit during the financial crisis, and it’s a very important factor to consider in this environment as well. Another factor to consider is that TD is mainly a retail bank, which again makes it a lower-risk business.

To top it all off, TD also pays out just under half of its income to shareholders, so the likelihood of a cut is very remote.

The verdict

There’s no reason not to hold both stocks in your dividend portfolio, but if you had to choose one, then TD is probably worth paying up for.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Dividend Stocks

financial freedom sign
Dividend Stocks

Million-Dollar TFSA: 1 Way to Achieve to 7-Figure Wealth

Achieving seven-figure TFSA wealth is doable with two large-cap, high-yield dividend stocks.

Read more »

analyze data
Dividend Stocks

How Much Will Manulife Financial Pay in Dividends This Year?

Manulife stock's dividend should be safe and the stock appears to be fairly valued.

Read more »

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »

money cash dividends
Dividend Stocks

Passive Income: The Investment Needed to Yield $1,000 Per Annum

Do you want to generate a juicy passive-income stream? Here's a trio of stocks that can generate a yield of…

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Dividend Stocks

Invest $10,000 in This Dividend Stock for $1,500.50 in Passive Income

If you have $10,000 to invest, then you likely want a core asset you can set and forget. Which is…

Read more »

Dividend Stocks

Here’s the Average TFSA Balance in 2024

The average TFSA balance has steadily risen over the last six years and surpassed $41,510 in 2023. Will the TFSA…

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

TFSA Set and Forget: 2 Dividend-Growth Superstars for the Long Run

I'd look to buy and forget CN Rail (TSX:CNR) and another Canadian dividend-growth sensation for decades at a time.

Read more »