Even though dividend stocks, especially if they have a non-existent or meager capital appreciation element, offer better returns as relatively long-term holdings, few of them deserve to be “held forever.” They might not have enough financial stability to sustain or grow their dividends for decades.
But there are businesses with proven track records of financial stability and generosity with dividends and secure prospects that you can practically buy and forget about them for decades. And if they offer a decent amount of capital appreciation potential alongside dividends, the collective return over a few decades can be pretty significant.
One dividend stock that offers both a decent yield and growth potential is the king of the banking sector, the Royal Bank of Canada (TSX:RY)(NYSE:RY).
The largest Canadian bank
Royal Bank of Canada is one of the largest, most stable financial institutions in North America and the largest in the country, at least when by market capitalization ($179.6 billion). It was also the largest company on the TSX until it was dethroned by the tech giant Shopify.
The bank has operations in about 36 countries, an impressive presence in the U.S., and 17 million clients. The bulk of its revenue (58%) is generated here in Canada, 26% comes from the U.S., and the rest comes from other international markets. That’s a major plus for the bank.
RBC generates most of its revenue from personal and commercial banking (46%), but a decent portion of it comes from capital markets (28%) and wealth management (17%). It also has a decent range of mutual funds.
Even though the revenues grew in 2020, net income and cash earnings took a dive, but as per the results of the second quarter of 2021, the bank is turning things around. The banking sector of Canada is quite stable, and right now, it’s at a key position in an economy that’s recovering quite rapidly.
A stock worth holding
RBC is currently offering a modest 3.4% yield. If you had bought into the company when it was still trading in double digits, you wouldn’t just have experienced a significant capital appreciation but would have also landed a more generous yield. And even though the stock isn’t exactly expensive right now, it’s also not a bargain from a valuation perspective.
Another reason to consider buying and holding RBC is its long-term growth potential. Its current 10-year compound annual growth rate (CAGR) is at 13.1%, but it’s slightly skewed thanks to the recent spike in the stock value. But even if we stick to a relatively conservative number of 10% growth a year and you hold onto RBC for about three decades, you can turn a $10,000 investment into a robust $174,000 nest egg.
Foolish takeaway
Even though it’s not precisely overvalued, it might be a good idea to wait a while before buying RBC. The bank, along with the others in the sector, was riding the wave of optimism to the top, and it might start normalizing in a quarter or so.
It’s an evergreen stock, but even when you are thinking in terms of decades, taking advantage of a discount can go a long way.
