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Does Royal Bank of Canada Deserve to Be in Your TFSA?

Canadian investors are searching for top stocks to add to their TFSA holdings.

Let’s take a look at Royal Bank of Canada (TSX:RY)(NYSE:RY) to see if it deserves to be in your portfolio today.

Balanced revenue stream

Royal Bank generated nearly $10 billion in profits last year and is on track to blow through the milestone in 2016.

The results are impressive in the current environment with a large part of the success attributed to the company’s balanced revenue stream.

Half of Royal Bank’s earnings come from personal and commercial banking, which is the core segment for most of the big Canadian banks. The remainder comes from capital markets activities (23%), wealth management (13%), insurance (9%), and investor and treasury services (5%).

Royal Bank also has geographic diversification. The company gets 63% of its revenue from its operations in Canada, 20% from the United States, and 17% from its international business units.

Growth

Management is betting on the United States to help drive growth in the coming years. The company spent US$5 billion in 2015 to acquire California-based City National: a private and commercial bank that targets high-net-worth clients.

The deal provides Royal Bank with solid platform to expand its reach in the sector, and investors could see more deals going forward.

Risks

Some investors are concerned the Canadian housing sector could become a source of pain for the country’s banks in the medium term.

Royal Bank finished fiscal Q3 with $279 billion in Canadian residential mortgages on the books. Insured mortgages represent 48% of the portfolio, and the uninsured component has a loan-to-value ratio of 52%. This means house prices would have to fall significantly before Royal Bank starts to see material losses.

Most analysts expect the bubble to deflate slowly rather than pop, so Royal Bank should be fine.

Dividends

Royal Bank has a strong history of rewarding investors with higher dividends. The compound average dividend-growth rate for the past decade is 10%, and investors should see increases continue in line with earnings growth, which is targeted at 7% over the medium term.

The current quarterly payout of $0.83 per share yields 4%.

Should you buy?

Royal Bank isn’t as cheap as it was earlier in the year, but the stock remains an attractive long-term pick for TFSA investors. If you are looking for solid dividend-growth stocks to buy and forget about for 20 years, Royal Bank should be near the top of your list.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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