Investors are constantly on the lookout for stocks with attractive yield, and many are turning to the banks and telecoms to help boost returns in their portfolios.
Let’s take a look at Royal Bank of Canada (TSX:RY)(NYSE:RY) and BCE Inc. (TSX:BCE)(NYSE:BCE) to see if one is a better bet right now.
Royal Bank
Royal Bank is an earnings juggernaut. The company reported nearly $10 billion in profits for fiscal 2015, a year that was categorized as “challenging” by most of Canada’s bank CEOs.
Royal Bank has very strong retail, capital markets, and wealth management operations. It is also building a substantial private and commercial banking presence in the U.S. through its recent acquisition of City National Corporation.
Investors have been concerned the oil rout will hammer the Canadian banks. Royal Bank has increased its provisions for the sector, but the drawn exposure to energy companies is still less than 2% of the total loan book, so the overall impact is limited.
Housing is also on the minds of investors, but Royal Bank’s mortgage portfolio is in good shape. Only 54% of the portfolio is uninsured and the loan-to-value ratio on those mortgages is just 55%. This means the housing market would have to undergo a significant correction before Royal Bank takes a material hit.
Management just increased the quarterly dividend by 3% to $0.81 per share. That’s good for a 4.3% yield.
The stock has bounced off the recent lows, so it isn’t as cheap as it was a month ago, but long-term investors shouldn’t worry too much about the short-term moves in the share price.
Royal currently trades at 11.3 times earnings, which is lower than the five-year average.
A $10,000 investment in Royal Bank just 15 years ago would now be worth $51,000 with the dividends reinvested.
BCE
If Royal Bank is the king of the castle in the banking industry, then BCE is its counterpart on the telecom side.
The company is an absolute giant in the Canadian market, and the odds are pretty slim that any competitor will be able to knock BCE off its throne.
Over the past few years BCE has made several acquisitions that have placed it in a powerful position all along the value chain. In fact, most Canadians probably put a bit of cash into the pockets of BCE’s shareholders every week.
How?
BCE not only controls country-wide mobile and wireline networks, it also owns radio stations, a television network, specialty channels, retail chains, Internet portals, an ad agency, and sports teams.
Every time a Canadian sends a text, checks e-mail, downloads a movie, catches a Leaf’s game, listens to the weather report, or watches the nightly news, the odds are pretty good that BCE is involved somewhere along the line.
The company kicks off a ton of free cash flow and does a good job of returning it to investors thorough a steady stream of dividend hikes. Management recently raised the payout by 5% to an annualized distribution of $2.73 per share. That’s good for a yield of 4.65%.
BCE currently trades at 19.5 times earnings, which is above its five-year average.
A $10,000 investment in BCE just 15 years ago would now be worth $29,000 with the dividends reinvested.
Which should you buy?
Both stocks are great long-term holdings and deserve a spot in any dividend portfolio.
BCE is probably a safer bet in the current environment and offers the better yield, but it appears fully priced.
Royal Bank has delivered stronger 15-year returns and offers a more attractive valuation, so the name should carry more upside potential in the event that economic conditions improve faster than expected.
If you think the broader market has bottomed out, I would go with Royal Bank.
