Royal Bank of Canada (TSX: RY) is Canada’s biggest bank by market capitalization. Although Toronto-Dominion Bank has more assets, RY is valued more highly by the markets. That’s very impressive, because Canadian banks, in general, are known for quality. In 2008 and the spring of this year — periods that saw many U.S. and European banks fail — Royal Bank never suffered a serious liquidity problem. That fact is a strong testimony to the bank’s quality and persistence.
Indeed, Royal Bank has thrived in its +150 years as a publicly traded company. In the last 100 of those years, it has paid dividends and hasn’t missed a single payment. Investors buying RY today are likely to receive a similarly strong performance from their bank of choice going forward. In this article, I will explore Royal Bank’s dividends in an attempt to determine whether RY stock is worth investing in today.
How Royal Bank stacks up compared to its competitors
To determine how good Royal Bank of Canada is as a dividend stock, we first need to look at how it stacks up compared to its competitors. Most of Canada’s Big Six banks have high dividend yields these days. The question is, how do they compare to RY in terms of yield and payout ratios? The table below reveals the answer to that question.
| Yield | Payout Ratio | |
| Royal Bank | 4.65% | 35% |
| TD Bank | 4.72% | 37% |
| Bank of Montreal | 5.41% | 36.2% |
| National Bank of Canada | 4.62% | 42% |
| Bank of Nova Scotia | 7.2% | 43% |
| Canadian Imperial Bank of Commerce | 6.7% | 39% |
As you can see, Royal Bank’s dividend yield is comparable to those of its peers, but its payout ratio is much lower. This means that Royal Bank is paying out less of its profits as dividends compared to its peers.
Recent earnings
It’s not just Royal Bank’s high yield and low payout ratio that make it a good dividend stock. Its recent earnings results also argue for RY being a stock worth owning. In its most recent quarter, RY delivered the following:
- $14.4 billion in revenue, up 18.9%
- $3.9 billion in net income, up 8%
- $2.73 in diluted earnings per share (EPS), up 9%
- $2.82 in adjusted EPS, up 11%
Overall, it was a strong showing and well ahead of what analysts expected. Investors would likely do well by investing in Royal Bank of Canada stock today.
A major risk to watch out for
Despite all of the things that RY stock has going for it, it does expose investors to one glaring risk factor: Canada’s housing market.
House prices spent most of the last decade rising precipitously in price. More recently, prices have been cooling off. Because the Bank of Canada raised interest rates so much in the last 12 months, many Canadians are reporting that they can’t afford to service their mortgages. As a result, RY’s mortgages are in jeopardy. If Canadians can’t afford to pay them, then that means lost revenue for Royal Bank. So, all shareholders should hope that the Bank of Canada is near the end of its rate-hiking cycle. Another hike could cause trouble.
