Better Buy for Dividends: Royal Bank Stock or Enbridge?

Royal Bank and Enbridge are out of favour. Is one stock now oversold?

| More on:
data analyze research

Image source: Getty Images

Royal Bank (TSX:RY) and Enbridge (TSX:ENB) have seen their stock prices drop over the past year. Investors who missed the rally off the 2020 market crash are wondering if ENB stock or RY stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.

Royal Bank

Royal Bank is the largest company on the TSX with a current market capitalization near $170 billion. The stock trades below $122 per share at the time of writing compared to nearly $140 in February.

The choppy decline over the past seven months is due to investors trying to decide if soaring interest rates will trigger a severe recession. The Bank of Canada and the U.S. Federal Reserve are working to get inflation back down to their 2% target. To do this, they need to cool off the economy and loosen up the tight jobs market. Increasing interest rates is the tool they prefer to use to achieve the goal. Companies tend to reduce investment in new projects when debt costs are too high. At the same time, the steep rise in mortgage expenses forces households to reduce consumption of non-essential goods and services.

Economists widely expect the economy to go through a short and mild recession before the central banks ease up on rate hikes. There is a risk, however, that the central banks will push rates too high and keep them elevated for too long. If that turns out to be the case, the economy could go into a severe slump, and unemployment could surge. Businesses and households that are carrying too much debt could then default on loan payments. If things get really ugly, the banks could be in for a rough ride.

At this point, the drop in the share price of Royal Bank might be overdone, even considering the economic headwinds. The company reported solid fiscal third-quarter (Q3) 2023 results, with adjusted net income coming in at $4 billion for the quarter. That’s pretty good for three months of operations. Adjusted return on equity (ROE) remains high at 15.1%, and Royal Bank has adequate capital on hand to cover its pending acquisition of HSBC Canada and remain above the regulatory requirements. In the latest quarter, Royal Bank set aside more cash to cover potential bad loans compared to the same period last year, but the overall loan book remains solid.

Royal Bank raised the dividend earlier this year. At the time of writing, the stock provides a 4.4% dividend yield.


Enbridge is also a TSX giant with a current market capitalization of nearly $96 billion. The stock trades close to $47.50 at the time of writing compared to $59 in June 2022. The drop is largely due to the broader pullback in the energy infrastructure sector. Enbridge and its peers have large capital programs with projects that take years to complete. They use debt as part of their funding strategy, so higher interest rates make borrowing more expensive. This puts pressure on profits and can impact the cash flow available for distributions.

Enbridge’s $17 billion capital program, along with potential tuck-in acquisitions, should drive steady revenue growth in the coming years. The company’s pipeline, export, utility, and renewable energy assets generate steady cash flow to support the dividend. Enbridge raised the distribution in each of the past 28 years. At the time of writing, investors can get a dividend yield of 7.5%.

Is one a better pick?

Royal Bank and Enbridge both deserve to be anchor stocks for buy-and-hold investors. For a TFSA targeting passive income, Enbridge is probably the best choice today. Royal Bank might be better for RRSP investors looking to generate higher long-term total returns.

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.

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

4 Fabulous Dividend Stocks to Buy in July

Are you looking for long-term income? These four dividend stocks should not only provide you with value in July but…

Read more »

financial freedom sign
Dividend Stocks

5 Steps to Financial Freedom for Canadian Millennials

Follow these steps and nothing can stop Canadian millennials from achieving their early retirement dreams.

Read more »

Investor wonders if it's safe to buy stocks now
Dividend Stocks

We’re Only Getting Older: A Top TSX Stock That Benefits From an Aging Population

For a bet on the aging population, consider this small-cap stock with growth potential.

Read more »

Growing plant shoots on coins
Dividend Stocks

Yield Today, Growth Tomorrow: 3 Stocks to Keep Building Your Wealth

For investors seeking yield today and growth tomorrow, these top Canadian dividend stocks are certainly worth considering right now.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 10.72% Dividend Stock Pays Cash Every Month

This dividend stock remains a consistent, defensive dividend producer that will give up over 10% in income each and every…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA Investors: 2 Standout Domestic Stocks With 7% Yields

These top dividend-growth stocks look oversold.

Read more »

Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Despite their recent declines, the long-term growth outlook of these two top dividend stocks remains strong, which could help their…

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Growth Stocks vs. Value Stocks: Which Should You Choose?

There are growth stocks and value stocks, but there are also growing value stocks that fit into both sides of…

Read more »