Better Buy: RBC Stock or the Entire TSX?

Royal Bank of Canada (TSX:RY) is a robust stock, but the index fund could be better long term.

| More on:

Investing in stock market index funds is widely recommended. However, investors should consider if they can enhance their performance simply by picking the most attractive stock from the index fund. 

Here’s a closer look at the advantages and disadvantages of investing in RBC (TSX:RY) over the broader S&P/TSX Composite Index.

RBC

Canada’s most valuable company is a top pick for most investors. The company manages roughly $1.7 trillion in assets and its market value is about $184 billion. RBC’s recent acquisition of HSBC’s Canadian assets broadens this lead. The deal has cemented RBC’s position as the biggest bank in the country. 

Meanwhile, rising interest rates are another tailwind for the company. Banks see their profit margins expand as interest rates rise. These lenders simply pass the higher rates to borrowers, preserving their margins. 

That’s probably why RBC stock outperformed the market this year. The stock lost just 1.3% of its value since January. That’s effectively flat. Meanwhile, the S&P/TSX Composite Index is down 3.4% over the same period. 

RBC also offers a higher dividend yield. The index delivers a 3.3% dividend yield, while RBC offers 3.9%. That makes RBC a better choice for investors seeking passive income. 

Index fund

iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIU) doesn’t have some of the advantages of RBC. It offers a lower dividend yield and performed worse this year. However, it has some advantages, especially if you’re a long-term investor. 

Stability is probably the biggest advantage here. The index fund is spread across several sectors. That means its returns are correlated with the overall success of Canada’s economy. This year, energy and utility companies are outperforming. But in some years, technology companies or consumer brands could be the biggest winners. 

Last year, the index’s biggest holding was a tech stock. This year, it’s RBC bank. Next year, the index could have another top holding, depending on how its underlying stocks perform. Investors always have exposure to these big winners. 

Over the past 10 years, the index fund has delivered a compounded annual growth rate of 7.7%. That means every dollar invested in the fund has more than doubled since 2012. The index fund has only had a few years of negative returns over this period. Overall, investors have been exposed to far less volatility. 

An index fund is a better bet for conservative investors who are trying to preserve capital over the long term. 

Bottom line

Investors trying to beat the market and generate wealth should pick blue-chip stocks like RBC. However, if you’re worried about losing money and want to preserve capital over the long term, the broad index fund is probably a better pick. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

chart reflected in eyeglass lenses
Tech Stocks

Top Canadian AI Stocks to Watch in 2025

Celestica (TSX:CLS) stock and another Canadian AI stock are worth watching closely this holiday season.

Read more »

woman looks out at horizon
Investing

Is Sun Life Financial Stock a Buy for its 4% Dividend Yield?

Let's dive into whether Sun Life Financial (TSX:SLF) stock is a buy for its dividend yield alone, or if this…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

1 Magnificent Energy Stock Down 17% to Buy and Hold Forever

Down over 17% from all-time highs, Headwater Exploration is a TSX energy stock that offers you a tasty dividend yield…

Read more »

Man data analyze
Investing

Want $1 Million in Retirement? 2 Simple Index Funds to Buy and Hold for Decades

Just invest in a S&P 500 index fund and do nothing.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 21

Escalating geopolitical tensions and U.S. economic data remain on investors’ radar today as the TSX continues to hover above the…

Read more »

think thought consider
Investing

Should You Buy Couche-Tard Stock Aggressively Before Nov. 25?

Here’s what could help Couche-Tard stock rebound after its upcoming earnings event.

Read more »

calculate and analyze stock
Bank Stocks

4% Dividend Yield? I Keep Buying This Dividend Stock in Bulk!

If you find the perfect dividend stock, you never have to worry about investing again. And that's what you get…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Should You Buy the 3 Highest-Paying Dividend Stocks in Canada?

A few dividend stocks saw a sharp correction in November, increasing their yields. Are they a buy for high dividends?

Read more »