Why Royal Bank of Canada (TSE:RY) is a Must-Have Dividend Growth Stock for 2026

In an era marked by economic uncertainty and shifting market dynamics, dividend growth stocks remain a cornerstone of resilient portfolios. These equities offer not only income stability but also the potential for capital appreciation, provided their payouts are underpinned by robust earnings growth and prudent financial management. Royal Bank of Canada (TSE:RY) stands out as a compelling candidate for 2026, combining a track record of sustainable dividend increases with earnings performance that outpaces broader market trends.

A Track Record of Sustainable Dividend Growth

Royal Bank of Canada has demonstrated remarkable consistency in rewarding shareholders. Over the past five years, its dividend growth rate averaged , with more recent updates indicating a slightly tempered but still impressive 6.7%. This trajectory reflects a disciplined approach to capital allocation, balancing shareholder returns with reinvestment in growth opportunities. For 2025, the bank further solidified its commitment by raising its quarterly dividend to , a 6% increase from the prior year. Such increments are not arbitrary; they are anchored in the bank's ability to generate earnings growth that outpaces its payout obligations.

Earnings Momentum and Strong Coverage Ratios

Dividend sustainability hinges on a company's ability to grow earnings faster than its payout. Royal Bank of Canada's 2025 diluted earnings-per-share (EPS) of $14.07 marked a 25% year-over-year increase, driven by strong performance across all business segments and a capital-adequate position with a CET1 ratio of . This compares favorably to its 2024 EPS of $8.27, which itself from 2023.

The bank's forward dividend payout ratio of underscores its financial prudence. This metric, which measures the proportion of earnings distributed as dividends, remains well below the thresholds that typically trigger sustainability concerns. For context, a payout ratio above 80% often signals risk, while ratios below 50% provide a buffer for economic downturns. Royal Bank of Canada's current range ensures it can maintain or even increase dividends even if earnings growth moderates.

A Capital-Strong Institution in a Competitive Landscape

Royal Bank of Canada's strength is further amplified by its capital position and operational efficiency. Its fourth-quarter 2025 pre-provision, pre-tax earnings surged to , a 30% year-over-year jump, while its price-to-earnings (PE) ratio of as of January 2026 reflects investor confidence in its future cash flows. Though this PE ratio exceeds the bank's 3-year and 10-year averages, it is justified by its outperformance relative to the S&P 500, where 2025 Q4 EPS growth estimates rose to from 7.3% since early 2025.

The bank's strategic focus on balancing shareholder returns with capital preservation is evident in its projected payout ratio of , with analysts forecasting a stable range of 41% over the next three years. This approach aligns with its CET1 ratio of 13.5%, which exceeds regulatory requirements and provides a cushion for absorbing potential losses without compromising dividend commitments.

Forward-Looking Attractiveness

For income-focused investors, Royal Bank of Canada's 2.79% forward dividend yield offers an appealing proposition, particularly in a market where yields on broader indices remain subdued. This yield, combined with its history of growth, positions RY as a dual-purpose asset: a source of reliable income and a vehicle for long-term appreciation.

Conclusion

Royal Bank of Canada's combination of disciplined capital management, robust earnings growth, and a conservative payout ratio makes it a standout in the dividend growth space. As 2026 unfolds, its ability to navigate macroeconomic challenges while rewarding shareholders will likely reinforce its status as a must-have holding. For investors seeking stability and growth in an uncertain environment, RY exemplifies the power of aligning dividend policy with enduring financial strength.