The financial sector makes up approximately a third of the Canadian stock market. Therefore, it makes good sense to have exposure to solid stocks in the sector. Two financial stocks that I particularly like for the long term are Royal Bank of Canada (TSX:RY) and Brookfield Asset Management (TSX:BAM).
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RBC stock
Royal Bank of Canada is a leading Canadian bank that offers a diverse set of financial services, including personal and commercial banking, wealth management services, corporate banking, insurance, and capital markets services.
With RBC stock, investors can expect to grow their wealth steadily but surely. For example, over the last decade, the Canadian bank stock delivered total returns of about 10.7% per year. To be more concrete, an initial investment of $10,000 would have transformed to about $27,680, including the dividends it produced. This is a decent return for a blue-chip stock.
At $130.65 per share at writing, the dividend stock appears to be fairly valued, trading at a price-to-earnings ratio of roughly 11.5. In the last 10 years, it increased its adjusted earnings per share by almost 7.5% per year. Assuming it grows its adjusted earnings per share by 6% per year going forward, we can approximate long-term returns of just north of 10% per year for the stock.
Notably, the bank will be impacted by recessions, during which it would experience meaningful pullbacks. For example, during the pandemic market crash, RBC stock lost more than 25% from peak to trough. Those are not the times to panic but to load up on shares for outsized income and long-term returns. Once you buy shares at good valuations, you can essentially hold the shares, enjoy passive income, and watch your investment grow over time.
Brookfield Asset Management
Brookfield Asset Management is a large global alternative asset manager that’s growing at a high pace. Currently, it has US$916 billion of assets under management, of which about 50% is fee-bearing capital. It makes investments in quality assets that form the backbone of the global economy. To get a sense of its large scale, last year, Brookfield Asset Management deployed US$58 billion of capital, while netting gross monetization of about US$30 billion.
BAM has over a century’s history of owning and operating real assets and businesses. Currently, it operates in over 30 countries with investments in renewable power, infrastructure, private equity, real estate, and credit and insurance solutions.
More than 2,300 institutional clients entrust their capital with Brookfield Asset Management, believing that its investments could provide excess returns, diversification, less volatility, and predictable cash flows. It’s possible for BAM to earn total returns of north of 12% per year on its investments.
Because BAM is a capital-light business, it is able to target a high payout ratio of north of 90%. In fact, it just raised its dividend by about 19%, bringing its dividend yield to about 3.8%. This is a nice dividend yield for a growth stock. Analysts believe the stock is fairly valued. So, interested investors could start a position here and buy more shares on dips to target a lower cost basis.
