The Canada Pension Plan, or CPP, is a taxable retirement benefit that aims to replace a portion of your employment income in retirement. Generally, the average age Canadians start receiving the CPP is 65. But you can advance the payout and begin the CPP at 60 or delay it until the age of 70.
Now, why would you want to delay the CPP? Well, for every month the CPP is delayed, the payout will increase by 0.8% per month. It suggests, the CPP will increase by 42% for someone delaying the payout by five years.
The average CPP payout for a 65-year-old in 2024 is $758.32. So, for a 70-year-old, the average CPP payout will rise by 42% to $1,076.81. It’s evident that even if you delay the CPP by a few years, the benefit is not enough to lead a comfortable life in retirement.
Canadian retirees should build a sizeable nest egg and multiple income streams to supplement the CPP, resulting in a higher payout in retirement. One way to create a passive-income stream is by investing in quality high-dividend stocks such as Royal Bank of Canada (TSX:RY), which currently offers a forward yield of 4.1%. In addition to its tasty yield, investors will also benefit from long-term capital gains, as RY stock has risen by almost 90% in the past decade.
Is RBC stock a good buy right now?
Valued at $190 billion by market cap, Royal Bank of Canada is among the largest companies trading on the TSX. The Canadian banking sector is heavily regulated, allowing RBC and other big TSX banks to benefit from an entrenched position and steady market share.
It also means RBC has a conservative lending approach providing the giant with a strong business foundation and robust financials. While several banks in the U.S. were forced to cut, lower, and even suspend dividends amid the financial crash of 2008, RBC and its TSX peers easily maintained these payouts, showcasing the resiliency of their business models. In fact, RBC has paid shareholders a dividend every year since 1870, which is exceptional for a cyclical stock.
Several banks have underperformed the broader markets in the last two years due to rising interest rates, which have led to higher delinquency rates and a tepid lending environment. RBC ended the fiscal first quarter of 2024 with a CET1 (common equity tier-one) ratio of 14.9%. This ratio measures a bank’s ability to weather an economic downturn, and a higher ratio is preferred. In fact, RBC has the best CET1 ratio among all banks in North America.
RBC stock is quite cheap
Royal Bank of Canada pays shareholders an annual dividend of $5.52 per share. In the last 25 years, these payouts have risen at an annual rate of 10.3%, significantly enhancing the yield at cost.
Priced at 11 times forward earnings, RBC stock is very cheap and trades at a discount of 8% to consensus price target estimates.
A key earnings driver for RBC is its expansion efforts in the U.S., which is a highly fragmented market. Bay Street expects RBC to increase adjusted earnings by more than 6% annually in the next five years.
