The Safety Net: An Almost Perfect Dividend, Eh?

Marc Lichtenfeld

By the time you read this, I will be boarding the Crystal Symphony in Cairns, Australia, as part of The Oxford Club’s Chairman’s Circle Wealth Cruise from Australia to Bali, Indonesia. I hope my family appreciates what I have to do to put food on the table.

In honor of the faraway trip, this week’s Safety Net will focus on a company located outside the United States, although not too far. Paul asked me to take a look at Royal Bank of Canada (NYSE: RY).

Toronto-based Royal Bank of Canada pays a quarterly dividend and currently yields 3.8%.

It has paid a dividend since 1997, and it boosted the payout every year until the Great Recession. In 2009, the company cut the dividend by 10%, but the next year it was back to 2008 levels. Since 2010, Royal Bank of Canada has raised the dividend by a compound annual growth rate of 9.5%. (Due to currency fluctuations, there is some variance in the dividend.)

So, other than that hiccup in 2009, the track record is solid.

More Where That Came From

I expect Royal Bank of Canada to continue to pay and raise the dividend.

In fiscal 2013, which ended in October, the bank generated C$6.3 billion in free cash flow. Of that, it paid out C$3.8 billion in dividends for a payout ratio of 61%, which is below my 75% threshold.

If a company’s payout ratio is below 75%, I am comfortable that it can sustain its dividend in the near term. Above that, the dividend may be susceptible to a cut if the company has a bad year or two.

This is a better payout ratio than it’s had over the past few years as cash flow grew meaningfully in 2013 and should continue as earnings are projected to rise 10% annually over the next five years.

Assuming that cash flow rises along with earnings, Royal Bank of Canada will likely keep raising the dividend.

Royal Bank of Canada is the most profitable bank in Canada and one of the safest. It has a rock-solid balance sheet, so unless something completely unforeseen occurs, I don’t think shareholders have anything to worry about regarding its dividend.

That being said, the dividend cut in 2009 prohibits me from giving it a perfect score. But it’s pretty close.

Dividend Safety Rating: B

Let me know what stocks you want me to check out for dividend safety. Leave the ticker in the comments section below.

P.S. Speaking of Oxford Club trips and Canada – I hope you’ll join me this summer in Quebec City. Several years ago, Oxford Club Event Director Steven King and I happened to poke our heads into the Fairmont Le Chateau Frontenac while it was being renovated. It was a dreary, cold, rainy October day. I said to Steven, “This place will be spectacular when it’s finished and the weather is warmer.”

Steven must have felt the same way and booked the next Oxford Club Private Wealth Seminar at this incredible hotel in this beautiful city.

Of the 75 spots available, only 15 remain. If you’re interested, I urge you to sign up quickly. I expect it to be our greatest conference yet. You can get all of the details here.

And if you come, your first Labatt’s Blue is on me. I hope to see you there.

39 Responses to “The Safety Net: An Almost Perfect Dividend, Eh?”

  1. Jie B says:

    What do you think of MetLife and Wells Fargo in terms if safety and return?

  2. Dave Coughlan says:

    Could you please give your opinion on the safety of the dividend of Kinder Morgan Partnership, KMP-N.

    Thanks, Dave

    • Uriah Goldstein says:

      Dave if you’re going to buy Kinder why not get the g.p. (kmi) instead? Lower initial yield but much better long term growth prospects going forward? best, Uriah

  3. jonathan lee says:

    please comment on WMT and TGT

  4. Carol Dearinger says:

    Hi Marc,

    i’m wondering if you would please address the spin-off of SAI into SAIC and LDOS, re. their dividends.

    Thanks a bunch…and enjoy that cruise.
    Carol

    P.S. Thanks also for your clear instructions for your Dividend Multiplier strategy.

  5. JOHN ZIEGENHEIN says:

    MARK:WHEN I JOINED THE OXFORD CLUB LAST YEAR YOUR FIRST CORRESPONDENCE TALK ABOUT BUYING DIVIDEND PAYING STOCKS BEFORE THE EX DATE THEN SELLING SHORTLY AFTER AND BEING PAYED A DIVIDEND FOR THE PREVIOUS QUARTER. IF POSSIBLE CAN YOU REVISIT THE PROS AND CONS OF THIS TYPE OF INVESTMENT.JOHN ZIEGWNHEIN. PASADENA MD.

  6. Lloyd Duckman says:

    Please comment on Prospect Capital PSEC , Nasdaq
    Thank you
    L

  7. Houston VanHoy says:

    Please look at “TGT” dividend safety. Have a nice cruise.

  8. SallyCashman says:

    I would like an update on Compugen. I hold it. Do you still think it is a sell orhold?

  9. James Bortolotto says:

    How about dividend on these three :

    BTE
    CPG
    EGL.UN

  10. Bill says:

    Are dividends from Canadian stocks taxed both in Canada and the United States and if so at what rate?

  11. Betty Payne says:

    What kind of shape is Coca Cola in. I’m a novice in the Stock Market. Thank You. Betty

  12. Danny says:

    Hi Marc
    I believe that Royal Bank has paid dividends WAY LONGER then you stated. They did not cut their dividend but froze it for about 2 years. You may have been influenced by the CDN-US exchange rate .
    Danny

  13. Jamed Roh says:

    The most recommand stocks got B, Is there anyone get A?

  14. Kenneth Lange says:

    I am interested in your opinion of PCEF. It is a fund of funds yielding 8%. This is offered by Power Shares. Is this worth considering for the dividend?

  15. John Rea says:

    Please comment ion the dividend safety of Southern Company (SO).

    Thank you

  16. Carl Hasdal says:

    You didn’t mention the tax the Canadian government holds.

  17. george says:

    I have always done well with con Edison. Nyc power company. What do you think

  18. Greg Sexton says:

    I would love your thoughts about CXW!! Happy cruisin’.

  19. Wallace Hefner says:

    Sir: I was a bank Exec. for 33years, with two years out for Uncle Sam. Remember the draft. My bank was purchasded by a larger bank and turned it into a brank bank. Now I’m living on social security and Div. from my IRA. I need advice on safe stocks with(A) div. drawing at least 4-5 % Thanks for you help. Wally

  20. ronjald sakala says:

    PLease commment on dividend saftey of Eli Lilly (LLY0
    Thank you,
    Ron

  21. Randy Gropp says:

    Looking at CUS, Canexus a industrial chemical manufacturer. Is its 9.5% dvd for real in the long term? Your comments appreciated on this and overall balance sheet, many thanks RG.

  22. Joe Payne says:

    Could you please rate the dividend of AESAY. Thanks, JP

  23. Stephen says:

    At this time I am trying to set up an account with RBC 3.8 percent dividend is very SWEET. I wish I had more money to put in. Does anyone know what the miniums and maximums you can put in this bank…Happy investing

    SCH

  24. Randy Sigman says:

    Thanks for the Book, it was awesome. I like SO and TGT

  25. gail yucht says:

    Could you check cklr?

  26. Mark A. Reents says:

    Your thoughts on the safety of dividends for Ensco (ESV).

    Thank you

  27. Gerald says:

    Is there a 15% Canadian tax on RY? Is it best held outside a 301K?

  28. L WILLSON says:

    NYCB DIVIDEND

  29. William Z says:

    You forgot to mention that the Royal Bank of Canada must
    withhold Canada income tax on the dividends it pays, significantly reducing the dividend yield.

  30. Jan Upton says:

    Hi Marc,

    What do you think of PSEC as an investment and as far as safety of dividend? Love all your services – thank you so much!

    Jan

  31. claude wood says:

    Hello
    I have few dividend I would like to know the score on first is
    Agnc, tyy, ko, abt ,abbv. Also do you know any monthly paying
    Dividend stock that are a excellent recommendation. Thank hope
    To hear from you soon.

  32. Hi marc
    Could you give a rundown on whether you
    Think breitburn energys dividend is safe and what you think of the company ticker is bbep
    Thanks gregg

  33. jerry says:

    since your in australia do you have any thoughts on the potential of the huge shale deposit in southern australia

  34. David M Armbruster says:

    Sorry, misunderstood. How does NLY Annaly look for an A or B. If it isn’t either what is it. Thanks DAVE

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