Investors often turn to industry leaders when choosing stocks to put in their self-directed RRSP portfolios.
The strategy makes sense, especially when the companies have strong track records of dividend growth supported by rising earnings.
Suncor is a giant in the Canadian energy patch with a market capitalization of $62 billion. The company is primarily known for its large oil sands operations, but Suncor also has offshore oil facilities and is developing that segment. The company’s Hebron project went into commercial operation last year and is ramping up production.
The offshore assets are attractive, as the production can command global pricing due to their access to international markets.
Suncor also owns four large refineries with a retail division that includes roughly 1,500 Petro-Canada service stations. These downstream assets, as they are known, complete a fully integrated business structure that enables Suncor to make money all along the value chain.
When oil prices increase, margins get a good boost in the production segment. During times of lower oil prices, Suncor’s refining businesses can benefit from reduced input costs.
Suncor takes advantage of weak oil prices to buy distressed assets. We saw this during the last rout when it won a battle to take control of Canadian oil sands. That deal gave Suncor a majority interest in the massive Syncrude operation. Suncor also added to its ownership position of Fort Hills during the downturn, and is benefitting from the move now that the facility is complete and in production.
Suncor has raised the dividend for 17 straight years. The company hiked the payout by nearly 17% in 2019 and steady increases should continue. The industry still faces pipeline shortages, but that situation should see some relief in the next few years.
In the meantime, Suncor is still generating strong results and investors who buy the stock today can pick up a 4.2% yield.
Royal Bank is Canada’s largest financial institution with a market capitalization of $152 billion. The company is so important in the industry; it’s one of the few global banks deemed to be too big to fail.
Royal Bank has strong operations across a wide range of segments and geographic locations. The bank’s personal and commercial banking business, wealth management, and capital markets divisions drive most of the income, but Royal Bank also dabbles in insurance.
The company’s US$5 billion investment to acquire California-based City National in late 2015 has proven to be a wise move and marked Royal Bank’s big return to the United States, after a previous attempt to build a retail banking operation in the years before the financial crisis didn’t pan out as intended.
Royal Bank raised its dividend twice in 2019, giving investors a share of the profits every year since 1870. The current payout provides a yield of 4%.
Is one more attractive?
Suncor and Royal Bank should both be solid buy-and-hold picks for a self-directed RRSP portfolio.
If you only buy one, I would probably go with Suncor as the first choice today. The oil giant appears oversold right now and likely offers better dividend growth over the medium term.