Royal Bank of Canada (TSX:RY) stock is very well suited to retirees. Offering a cheap valuation, a high dividend yield, and low risk, it is suitable for those who need regular cash income from their investments. Although a portfolio consisting of nothing but RY stock is not a good idea, having the stock in a diversified portfolio definitely is. In this article I will explore the factors that make RY a retiree’s dream stock.
RY stock has a high yield
One desirable characteristic of RY stock is its high yield. Retirees typically have high income needs. That is to say, they need their investments to produce cash income. While younger Canadians typically work full time, retirees depend on their investments for their livelihoods. So while the former group can gamble on risky growth stocks, the latter group really ought to be invested in dividends and interest-paying investments like bonds.
RY stock has dividends in spades. At today’s prices, it has a 4.5% dividend yield, which means that you’ll get $4,500 back from every $100,000 you invest into it. That is assuming the dividend doesn’t change, but the dividend may in fact change. Over the last five years, RY’s dividend has grown by 7.3% CAGR per year. If the company keeps up its dividend track record, RY stock may have an even higher yield tomorrow than it has today.
A cheap valuation
Another thing that Royal Bank of Canada has going for it is a cheap valuation. Stocks as a whole are pretty pricey this year. Thanks to the launch of ChatGPT, tech stocks rallied, pulling the entire market up with them. Bank stocks are among the few classes of equities that didn’t join the party, even though their earnings grew this year. As a result, banks like RY are cheap. RY itself currently trades at:
- 10.6 times earnings.
- 3.1 times sales.
- 1.6 times book value.
- 4.5 times operating cash flow.
That’s a pretty cheap valuation. And, since Royal Bank’s earnings are rising this year, the stock’s multiples will shrink over time if its price does not change.
A stellar track record
A final factor that Royal Bank has going for it is a stellar historical track record. The bank was founded in 1860, making it over 150 years old. In all those years, you might imagine that RY would have suffered a financial panic or a major bank run, but it hasn’t. Over 150 years – a time period that includes the Great Depression and the 2008/2009 financial crisis – Royal Bank has never been at risk of collapsing. In the last 100 years, it has paid its dividend without interruption.
So, RY stock has a very illustrious track record. Banks are highly leveraged entities with lots of “debt” (deposits), so they are often thought of as risky. Royal Bank of Canada has stood the test of time, which is probably the number one test that a bank has to pass. So, retirees’ money is likely safe in it – whether in the form of deposits, GICs, or stock.
