Dividend stocks pay out billions of dollars of income to investors every year. Royal Bank is proudly one of them. Last year, Royal Bank of Canada (TSX:RY), or RBC, paid out $5.5 billion in dividends to its shareholders. In fact, the Canadian banking leader has one of the longest histories of paying dividends in Canada. As early as 1870, it started paying out dividends!
From the shareholders’ perspective, how much dividend income they receive this year depends on how many shares they own. If you hold 100 RBC common shares, you would receive $5.52 per share, or $552, in dividend income this year based on the current quarterly dividend of $1.38 per share.
RBC supports a safe and growing dividend
Investors often hold Royal Bank of Canada shares as a core holding in their diversified investment portfolios. They expect its dividend to be safe and grow over time. Indeed, RBC stock has a 1-, 3-, 5-, 10-, and 15-year dividend growth rate of approximately 7 to 8%.
RBC’s revenues and earnings are generally resilient because it has a diversified business. In fiscal 2023, it made 39% of its revenues from personal and commercial banking, 31% from wealth management, 20% from capital markets, and 10% from insurance. The bank’s core business is in Canada, making approximately 59% of its revenues at home. It also has a solid footprint in the United States, generating 25% of its revenues from our southern neighbour.
Banks’ business results are subject to the economic cycle. For example, when there are recessions, their earnings typically decline, partly because banks have to increase their reserves to counter higher levels of bad debt in gloomy economic times. Royal Bank is not an exception. However, in the last two recessions that occurred in the past 20 years, RBC’s earnings were resilient enough to cover its dividend.
The first criterion for a safe dividend is that the business is profitable. Another obvious criterion is that its payout ratio is sustainable. Typically, in a normal operating environment, the big Canadian banks, RBC included, maintain a payout ratio of about 50% of earnings. This year, RBC’s payout ratio is estimated to be about 52% of diluted earnings. So, its dividend looks safe.
Investor takeaway
With an investment in RBC stock today at under $141 per share, investors start out with a dividend yield of 3.9%. You’ll notice there are higher yields available in the Canadian banking space. However, it also goes to show that RBC is a quality name. On checking its valuation, it trades at a price-to-earnings ratio of about 12.5, which more or less aligns with its long-term multiple and indicates the stock is fairly valued.
In the past 10 years, Royal Bank increased its adjusted earnings per share at a compound annual growth rate of almost 7.5% per year. Let’s be conservative and project earnings growth of 6% per year going forward. Combined with its dividend, we can approximate long-term total returns of about 10% per year.
In summary, it’s an okay buy for long-term portfolios today, especially if you only care about earning safe dividends. However, if you’re looking for a better margin of safety for your capital, wait for a meaningful correction of at least 10%.
