If you’re a retiree looking for solid dividend income, there are few stocks better than Royal Bank of Canada (TSX:RY)(NYSE:RY). With a 4.5% yield at today’s prices, it’s a high yield stock with potential for serious dividend growth. In the past five years, RY has grown its dividend by 7.3% per year. If that growth continues, then the yield on shares bought today will be higher tomorrow. So this is a stock that already has a high yield, and potentially a higher yield-on-cost in the future.
While banks in general got hammered by COVID-19, Royal Bank fared better than most. As a result, it’s now one of the safest Canadian bank stocks, while still having a very high dividend yield. This combination of characteristics makes RY one of the best Canadian stocks for retirees.
Solid results in the third quarter
In the third quarter, we saw Canadian banks start to recover from their COVID-19 damage. Many of the big banks posted strong sequential growth, with third quarter earnings higher than second quarter. Royal Bank, however, also posted solid year-over-year numbers, with earnings down only 2% from Q3 2019. That’s not some fluke caused by poor results last year, either. In Q3 2019, Royal Bank delivered 5% year-over-year earnings growth. So we’re seeing RY beginning to get back to where it was in 2019, which was itself a solid year.
Of course, much of RY’s Q3 growth was caused by a reduction in Provisions for Credit Losses (PCL). PCL is estimated losses; when PCL increases, earnings decrease. In Q3, Royal Bank reduced its PCL by $2.1 billion. That caused a huge earnings jump over Q2 and near-parity with Q3 2019. However, lower PCL isn’t necessarily a good thing long term. If a bank “low balls” its loss estimates, it could get in trouble in the future.
A high yield and rising dividend
The most attractive feature of Royal Bank stock for retirees is its dividend. As of this writing, RY had a 4.5% yield. That means you get $4,500 back in dividends each year on a $100,000 position. With a $500,000 portfolio at an average yield of 4.5%, you get back $22,500 a year in cash income. This is the kind of yield that can produce a sizable income supplement without a massive amount of money invested.
If you’re a retiree, that’s something you should pay attention to. In general, retirees tend to value income and safety above capital gains. The reason is that when you’re retired, you need income to live off of, and don’t have enough years left to take huge risks. For this reason, retirees are often counselled to put a large percentage of their money in fixed incomes.
That’s probably a good idea in general. But when it comes to the portion of your portfolio that you have in equities, bank stocks like RY would make a great fit.
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 Andrew Button has no position in any of the stocks mentioned.