With food inflation weighing down Canadian consumers, it feels like the next big Bank of Canada decision could be a tougher one to make. Undoubtedly, perhaps the rate cuts have come too quickly, with what remains of post-pandemic inflation continuing to linger while other factors look to reignite untimely price increases. While a rate hike might seem like the best move from the Bank of Canada as it looks to course correct, so to speak, I certainly wouldn’t be surprised if the pause button were to be held on for a while longer.
While there are notable downsides to the wait-and-see approach, investors shouldn’t expect rates to deviate too far from the 2.0-2.5% range. Many big banks expect rates to stay at these levels for longer (the rest of the year and maybe into 2027). But a stable or “stuck” rate environment isn’t necessarily a bad thing, especially if the headline inflation figure stays within an acceptable range.
As rates find a new floor to spend the next couple of quarters in, investors may wish to check out higher-yielding dividend stocks as risk-free rates of return become too low to accept, while longer-duration bonds offer a proposition that some would describe not as risk-free return, but as return-free risk (at least in real terms). In any case, the following dividend stock looks like a great pick for yield seekers looking to thrive in a world of 2.25% rates.
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Royal Bank of Canada
Royal Bank of Canada (TSX:RY) stock looks like a terrific buy, as the big banks look to enjoy loftier net interest margins (NIMs) in this climate. Remember that NIMs are the difference between the rates charged for loans and what the big banks must pay depositors.
Right now, that spread is in a good spot, and even if the Bank of Canada sits on its hands for a while longer, I view Royal Bank of Canada as well as its peers as well-equipped to continue enjoying NIMs as they enter a “sweet spot,” so to speak.
It’s not just personal banking where Royal Bank can flex its muscles. Add momentum in wealth management and capital markets, and RY stock might still be too cheap, even at a seemingly fair 16.11 times trailing price-to-earnings (P/E) multiple.
In addition to industry tailwinds, Royal Bank of Canada stands out as a quick adopter of cost-saving tech. The real upside, I believe, lies in the growth and margin gains to be had if Royal Bank can automate across the board.
AI adoption could fuel more generous dividend growth
While the 2.84% dividend yield might be modest, I’d argue that Royal Bank is best-positioned for a dividend growth spurt over the next three years, especially if its AI strategy pays off. Of course, agentic AI has been all the rage of late, and while the tech holds immense potential, I view the tech-savvy banks, like Royal, as best-positioned to actually drive AI-induced returns on investment.
The AI benefits might not be all too far off, with the bank looking to hit $1 billion in enterprise value at the hands of AI by next year. If Royal can pull it off, perhaps the AI revolution is the real deal, and it’s underrated banks that could be early collectors of productivity gains.