Let me be crystal clear. Determining whether Royal Bank of Canada (TSX:RY) or Enbridge (TSX:ENB) is a better buy for dividends is not an apples-to-apples comparison because they’re very different businesses from different sectors. That said, I can still provide a dividend perspective when comparing them below.
Business overview
Other than the personal and commercial banking business segment that contributed to approximately 40% of Royal Bank or RBC’s fiscal 2022 revenue, the leading Canadian bank also has a sizeable wealth management business that made up about 30% of its revenue. Additionally, its capital markets segment comprised roughly 18% of its fiscal 2022 revenue. The rest of its revenues came from insurance, and investor and treasury services. Last fiscal year, RBC generated 59% of its revenues from Canada and 25% from the United States.
Enbridge consists of a large liquids and gas pipeline network in North America. It is also North America’s largest natural gas utility. The company earns diversified streams of cash flows from customers who are 95% investment grade. About 80% of its EBITDA, a cash flow proxy, has inflation protection. So, it has some exposure to inflation risk.
Although the company maintains an investment-grade S&P credit rating of BBB+, it does have large debt levels on its balance sheet. Furthermore, higher interest rates have increased its interest expenses. For example, its trailing-12-month interest expense is 28% (or $772 million) higher than in 2019 whereas its debt-to-asset ratio in the last quarter was 63% versus 2019’s 57%.
Dividend
At $108.76 per share at writing, RBC stock offers a dividend yield of just under 5%. Its payout ratio is estimated to be sustainable at about 52% of this fiscal year’s earnings. For your reference, its five-year dividend growth rate is 7.3%.
Investors should note that when the economy is gloomy, such as during a recession, the regulator typically asks the bank (and its peers) to freeze their dividends, which was what happened around the Global Financial Crisis of 2007-08 and 2020 pandemic. In the long run, RBC’s dividend growth should more or less follow its earnings growth. Management targets a medium-term earnings-per-share growth rate of about 7%.
Enbridge stock offers a massive dividend yield of just under 8%, at $44.56 per share at writing. ENB’s year-to-date payout ratio is about 63% of its distributable cash flow. Its five-year dividend growth rate is 7.3%, but through 2025, investors can expect a dividend growth rate of about 3%. Post-2025, the stock could potentially increase its dividend growth to about 5% per year.
Which is a better buy for dividends?
Assuming investors bought shares of both stocks today, it is going to take a long time for RBC’s dividend generation to catch up to Enbridge. For example, assuming the dividend growth rates as discussed in the previous section, by 2027, the yield on cost on the RBC position would be just under 6.5%, while for the ENB position, the yield on cost would be just north of 9.3%. So, based purely on dividend income generation, Enbridge stock is a better buy.
Based on valuation, though, the analyst consensus price targets represent a 20% discount for RBC shares and 13% discount for ENB shares. So, Royal Bank appears to be a cheaper dividend stock for long-term investing.
