RBC Stock: Defensive Bank for Safe Dividends and Returns

Royal Bank of Canada (TSX:RY) is the kind of blue-chip stock that investors can buy and forget.

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Royal Bank of Canada (TSX:RY) is the kind of blue-chip stock that investors can buy and forget, especially if they buy shares on meaningful market corrections.

The leading Canadian bank makes money from diversified operations. Last fiscal year, it generated about 39% of its revenues from personal and commercial banking, 31% from wealth management, 20% from capital markets, and 10% from insurance. Approximately 59% of its revenues came from Canada, 25% were from the United States, and 16% were international.

This diversification mix makes its revenues and earnings more resilient than the average Canadian bank. For example, during the pandemic-impacted fiscal year 2020, RBC only witnessed a 12% drop in its adjusted earnings per share, faring better than most of its big Canadian bank peers. Its earnings also more than recovered by the following year, resulting in an earnings-growth rate of north of 11.5% annually from fiscal 2019 to 2021.

Zooming out for the longer term, say, over the last 10 years, Royal Bank of Canada increased its adjusted earnings per share by about 7.5% per year. This means if investors bought RBC shares at a fair valuation at the start of the decade, they saw their shares rise about 7.5% per year, as the stock is fairly valued now. In addition, the stock also churned out a safe and growing dividend.

How to get a better deal in RBC stock in a market correction

The shares are down 1.22% during intraday trading as of writing. I say, for RBC stock, ups and downs of 1-3% is a normal trading day. At $133.38 per share, RBC stock offers a dividend yield of north of 4.1%. To consider it as a market correction for the blue-chip stock, I would say it requires a drop of 7-15% from a high.

For example, last year, the stock fell a little more than 15% from peak to trough. At the time, there was bad news about a tough economy adjusting to rapidly increasing interest rates, leading to higher levels of bad loans for banks. The actual fiscal 2023 result for RBC was that it saw its adjusted earnings per share and diluted earnings per share rise about 2% and fall 5%, respectively.

RBC stock offers dividends you can depend on

RBC stock has a strong dividend-paying history. Its first year of paying dividends was 154 years ago. In the last 10 years, the large bank has almost doubled its dividend. Specifically, investors who received $1,000 of annual dividend income from it 10 years ago would be receiving about $1,944 in annual dividends this year if they did not change their position.

Investing takeaway

Going forward, assuming a more conservative earnings growth rate of 6%, we can approximate long-term annual returns of more or less 10% for buyers of RBC stock today. To summarize, RBC stock is a good consideration for long-term, diversified portfolios. The buy-and-forget, sleep-well-at-night stock pays out a safe dividend that’s sustainable based on a payout ratio of roughly 50% of adjusted earnings. So, it’s set to grow its dividend over time.

It is fairly valued today. Interested investors could nibble here. Investors who can wait could see if it would fall 7-15% from a high to get a better deal.

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.

Fool contributor Kay Ng has positions in Royal Bank Of Canada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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