When it comes to dividend investing, bigger doesn’t always mean better for Canadian investors. While large-cap stocks might seem like the safest bet, many smaller or mid-sized companies often offer higher dividend yields and stronger growth potential.
For example, according to recent data, small-cap dividend stocks on the TSX have historically provided an average yield of about 4%. Meanwhile, large-cap stocks tend to hover around 2-3%. The key is to focus on the right metrics, such as payout ratios and growth potential, rather than just the size of the company.
Royal Bank
Royal Bank of Canada (TSX:RY) has long been a strong performer, boasting a market cap of $232.08 billion and consistent growth. In the past, Royal Bank has delivered solid revenue growth driven by its diverse financial services. For the third quarter (Q3) of 2024, RBC reported a net income of $4.5 billion, up 16% year over year, with diluted earnings per share (EPS) climbing 13%. The bank’s capital strength, reflected in its common equity tier-one (CET1) ratio of 13.0%, shows why it’s a dominant player. However, despite its steady performance, RBC’s compound annual growth rate (CAGR) for dividends over the past decade has been modest. In fact, it is lagging behind expectations for a stock of its stature. With a five-year average dividend yield of 3.91%, some investors feel RBC could have done more in terms of dividend growth.
While Royal Bank remains a stable option, its relatively low CAGR for dividends highlights a gap compared to other financial stocks. With a forward annual dividend yield of 3.46%, it’s clear that investors can enjoy decent, though not exceptional, returns. As Dave McKay, president and chief executive officer (CEO) of Royal Bank, noted, “RBC continues to operate from a position of strategic and financial strength.” However, for those seeking higher dividend-growth rates, it may be worth considering other options alongside RBC in a balanced portfolio.
CIBC
Canadian Imperial Bank of Commerce (TSX:CM) offers an appealing alternative, particularly for dividend-focused investors. With a forward annual dividend yield of 4.47% and a consistent CAGR in its dividend growth, CIBC provides both security and growth. In Q3 2024, CIBC reported impressive earnings momentum, with a net income of $1.8 billion, up 25% year over year. The bank’s strong results are backed by its commitment to delivering value through shareholder returns and capital efficiency.
CIBC’s earnings momentum and its focus on strategic initiatives make it a reliable choice for investors. As Victor Dodig, CIBC’s CEO, said, “Our strong third-quarter results reflect the consistent, disciplined execution of our client-focused strategy.” With a CET1 ratio of 13.3%, CIBC remains financially robust, making it a solid option for dividend investors seeking both growth and stability.
Bottom line
In a nutshell, while bigger companies like Royal Bank may offer stability, they don’t always deliver the highest dividend growth. CIBC, however, brings a solid combination of strong earnings momentum and a higher dividend yield, making it an excellent choice for Canadian investors looking to balance growth and income in their portfolios. So, remember, size isn’t everything. Focus on what works best for your long-term goals!
