Looking for Reliable Dividends? Read This
Long-time readers of Income Investors would know that the big Canadian banks are some of the best-kept income secrets in today’s stock market.
They have a track record of paying reliable dividends through thick and thin, and for the most part, they’ve offered higher dividend yields than many of their U.S. counterparts.
That said, due to the incredible rally in Canadian bank stocks over the past year, their yields aren’t as high as before. Royal Bank of Canada (NYSE:RY), for instance, was yielding four percent at the end of last year. Since then, its yield has come down to about 3.5%.
Still, for income investors, RY stock isn’t a ticker to be ignored.
First of all, while Royal Bank of Canada stock isn’t yielding as high as before, the amount is still commendable by today’s standards. The last time I checked, the average dividend yield of all S&P 500 companies was 1.4%. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed June 21, 2021.)
Second, the bank offers strong dividend safety. Royal Bank of Canada is the largest bank in Canada by market capitalization. Its history can be traced all the way back to Merchants Bank of Halifax in 1864. Today, it’s one of the leading financial services companies in North America, providing personal and commercial banking; wealth management; insurance; investor services; and capital markets products and services. The company serves 17 million customers in Canada, the U.S., and 27 other countries.
Of course, being an established player in the banking industry doesn’t necessarily mean the company can pay reliable dividends. Those who remember the financial crisis of 2008 would know how much banks can really cut their payouts.
But RY stock wasn’t one of the dividend cutters. The bank was paying increasing dividends up till the end of 2007, when its quarterly payout reached CA$0.50 per share. Royal Bank of Canada stock maintained its cash dividend at CA$0.50 per share every quarter throughout the financial crisis and started hiking its payout again in 2011. (Source: “Common Share Information,” Royal Bank of Canada, last accessed June 21, 2021.)
Today, RY stock’s quarterly dividend rate stands at CA$1.08 per share, meaning its payout has more than doubled over the past decade.
The rising dividends are backed by a solid business. According to its latest earnings report, Royal Bank of Canada generated diluted earnings of CA$2.76 per share in the second quarter of its fiscal 2021, which ended April 30. The amount was well in excess of its quarterly dividend payment. (Source: “Second Quarter 2021 Earnings Release,” Royal Bank of Canada, May 27, 2021.)
From 2010 to 2020, the bank had an average dividend payout ratio of just 47%, leaving a wide margin of safety. (Source: “Royal Bank of Canada Investor Presentation: Q2/2021,” Royal Bank of Canada, last accessed June 21, 2021.)
Third, if you still think a safe 3.5% yield isn’t exciting enough, there’s a way to earn even more income from Royal Bank of Canada: preferred shares.
Preferred shares are a class of ownership in a company that is senior to common stocks but subordinate to bonds in terms of claims to a company’s assets and earnings. Companies must pay the specified dividends on preferred shares before paying dividends on common stocks.
Royal Bank of Canada has several series of preferred shares, including one in which dividends are denominated in U.S. dollars: Royal Bank of Canada DS Representing 40 interest 6.750 Non Cumulative Perpetual Pref Shs Series C 2 (NYSE:RY-T). The bank pays quarterly dividends of $0.421875 per depositary share of this series of preferred stock. With RY-T stock trading at $28.82 per share, the preferred stock offers an annual yield of 5.9%.
And since even the common dividends of Royal Bank of Canada are considered safe, the preferred shares are certainly worth considering by risk-averse income investors.
There is, however, one thing to keep in mind when it comes to preferred stocks: they behave more like bonds. In other words, if a company substantially grows its business, its common stock will likely go up in value, but preferred shares don’t usually move much.
Bottom Line on Royal Bank of Canada
Put it all together and it’s pretty easy to see why Royal Bank of Canada stock could be special.
The bank’s common stock offers safe and growing dividends at a decent 3.5% yield, and its preferred shares can pay even more. However you look at it, Royal Bank of Canada deserves the attention of income investors.