It’s always a treat when the company behind the stock in your portfolio raises its dividend by a generous amount. When it comes to dividend giants like Royal Bank of Canada (TSX: RY), many Canadian investors come for the respectable upfront yield (currently at 2.5%) while staying for the dividend growth.
Of course, the Big Six banks have enjoyed quite the outstanding rally in the past few years. And, as a result, yields have compressed by a wide margin. If you’re looking for 4–5% yields on the big bank stocks, you could be waiting for quite a while longer.
Either way, when it comes to Royal Bank, which most recently increased its payout by close to 7%, I do think that it is possible for investors to stick with the giants atop the TSX Index and do extraordinarily well over time. Royal Bank of Canada is a $388 billion company now. And it could eclipse a $400 billion market cap before the year comes to a close.
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The big bank rally is on hold
While it’s hard to lose with any one of the Big Six bank stocks these days, I still think that Royal Bank of Canada is a cut above. Of course, the premium multiple of 17.7 times trailing price-to-earnings (P/E) is rich historically. But, at the same time, it’s not a bad price to pay for an industry juggernaut that could certainly command a richer premium to the peer group.
As obvious a play as Royal Bank of Canada may be (it doesn’t get more obvious than Canada’s largest company by market cap), I still think it’s a giant worth holding for life, especially now that the great bank rally is starting to show a bit of fragility.
With shares of RY dropping close to 8% from all-time highs, I think there’s a chance to get a fairly decent, albeit mild, deal on a name that’s more than worthy of a core holding.
Royal Bank’s dip looks more like an opportunity than a red flag
Whether it’s trade uncertainties with the U.S. or expectations for higher rates on this side of the border, it feels like several macro factors are weighing on a name that’s probably just going to keep performing for investors. The last quarter was outstanding, and the full-year guide still looks robust despite the macro unknowns. With expectations a bit lower, perhaps the red-hot bank stock now has what it takes to shock and awe again.
What’s most exciting, in my view, is the bank’s AI capabilities and, more importantly, its ability to implement the technology in a way to drive significant savings. As a Canadian bank that’s leading the way, I wouldn’t sleep on the strong longer-term narrative just because we’ll have to deal with a few rate hikes in the coming year.
While it’s hard to say where the latest correction in the name will take investors, I do think that long-term investors shouldn’t hesitate, as the multiple drops and the yield looks to swell again. Who knows?
Maybe the days of 3–4% yields on the big banks will make a comeback next year. Time will tell. Either way, I wouldn’t dare venture a bet against the big banks, certainly not Royal Bank with its impressive tech savvy.
