Written by Andrew Walker at The Motley Fool Canada
Royal Bank (TSX:RY) recently hit its lowest price since early 2021. Contrarian investors who missed the rally off the 2020 market crash are wondering if RY stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) targeting dividends and total returns.
Royal Bank stock
Royal Bank trades near $112 per share at the time of writing compared to its 12-month high of $140.
The drop in the share price is primarily due to the sharp increase in interest rates that has occurred over the past 18 months, as the Bank of Canada and the United States Federal Reserve battle to get inflation back down to the 2% target. Some progress has been made, but September inflation in both countries came in at just under 4%, so their job isn’t done.
Additional rate hikes could be on the way if inflation stays sticky. At this point, the market is anticipating a pause from the central banks to see how things play out in the next few months.
Bank stocks are down because investors are worried that rates are already too high and the full impact of the rate hikes hasn’t hit the economy. There is a risk that spending could grind to a halt as businesses and homeowners struggle to cover increased debt costs. In the event the economy goes into a deep recession, there could be a wave of loan defaults.
Royal Bank and its peers are already setting aside more cash to cover potential loan defaults. This trend could continue for the next few quarters.
Royal Bank dividend
Royal Bank increased the dividend by about 2% earlier this year. That should be a sign to investors that the management team is not too concerned about the profit outlook. The bank has a great track record of paying reliable and growing dividends, even during difficult economic times.
Royal Bank is in the process of trying to get its $13.5 billion takeover of HSBC Canada approved by the government. If the deal is completed as anticipated in 2024, investors could see a nice boost to the dividend.
At the current share price, investors can get a 4.8% dividend yield from Royal Bank stock.
Royal Bank earnings
Royal Bank remains very profitable, even in the current economic environment. The company generated net income of $3.9 billion in the fiscal third quarter of 2023. Return on equity remained high at 14.6%, and Royal Bank has a solid capital cushion to ride out any additional turbulence in the markets.
Is Royal Bank a buy today?
Volatility should be expected until the central banks indicate they are done raising interest rates, but buying Royal Bank stock on big dips has historically proven to be a profitable move for patient investors. The stock already looks cheap, and investors who buy now get paid a decent dividend yield to wait for the rebound.
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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.