Canada has a massive financial sector. Four of the six biggest banks in the country are among the 10 largest publicly traded companies in the country (usually), and the most valuable company in the country is also a bank and has been for years.
That bank, i.e., Royal Bank of Canada (TSX:RY), is what I’d buy instead of TD Bank. It’s not just a dividend superstar like most Canadian bank stocks, but it is also a promising growth pick.
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Why Royal Bank over TD Bank?
The first reason to look into any other bank than TD right now is the legal trouble it’s facing in the United States. A money-laundering probe is aimed at the bank in the U.S., and its Anti-Money Laundering (AML) measures and practices are under a microscope right now. There is nothing concrete yet, but speculation alone can hurt the bank’s reputation.
It’s part of the reason behind the bank’s underwhelming performance this year. Ironically, that performance improved TD Bank’s yield significantly, to 5.3%, which is significantly higher than Royal Bank’s 3.8% yield.
I’d still prefer it over TD Bank because of the lack of uncertainty. The yield difference might shorten in the upcoming market correction, but if the probe leads to any major charges, the bank might experience actual financial trouble, which can impact its ability to sustain its dividends or at least its growth to some extent. Royal Bank is comparatively a far safer choice.
A solid combination of dividends and growth potential
Royal Bank of Canada has a solid dividend history. It has been paying dividends for decades and has been growing them for 12 consecutive years. The payout ratio (and its history) are rock solid and the dividend growth is actually quite decent at 35% in the last five years. This makes it adequately inflation-resistant and a solid pick for a long-term, reliable passive income.
Another benefit the bank offers is solid capital-appreciation potential. In the last 10 years, the stock price rose by about 86%, the second highest among the big six banks. The valuation is a little bit on the high side, but that doesn’t undermine all the other strengths you might consider this dividend superstar for.
Foolish takeaway
The bank is a solid pick for dividends alone, but if we throw in the growth potential as well, it becomes an even more attractive choice. One way to improve upon that is to wait until the stock is discounted. A bear market is already here, and once the stock dips enough, you will be able to lock in a much better yield, and the recovery-augmented growth might be a bit higher as well.
