Integrated Project Part 4 - Dividend Policy (1)

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1 Integrated Project: Part 4 Dividend Policy Completed by RBC – Royal Bank of Canada November 3, 2023 Correctly Explained the Different Dividend Policies Dividend Policies A company's dividend policy outlines how it distributes earnings to its shareholders. Various factors and considerations influence this policy. For the Royal Bank of Canada (RBC), the dividend policy is a critical component of its financial strategy. RBC's

2 dividend policy reflects its commitment to providing returns to its shareholders while maintaining financial stability and growth. The following vital elements characterize RBC's dividend policy: Correctly Explained the Factors that Affect Dividend Policy, for example, Stability and Industry Norms Stability: Maintaining a stable dividend policy for RBC is crucial as it sends clear signals to investors. Significant changes, particularly decreases in dividend payments, can be interpreted negatively by shareholders, leading to a decrease in the share price ( Ross et a l., 2022) . Conversely, increasing dividends signals strong performance, which can lead to an increase in the share price. RBC may borrow money to maintain or increase dividend payments during short-term underperformance to avoid signaling poor performance rather than reducing dividend amounts. Industry Norms: When determining its dividend policy, RBC considers the nature of the financial industry and the prevailing industry norms. Stability in earnings is a hallmark of the financial sector, and RBC aims to adopt a consistent dividend policy (Ross et al., 2022). This approach aligns with the stable earnings typical of the banking industry. In contrast, industries characterized by uncertain and irregular earnings may opt for a more conservative approach to dividend payouts. By adhering to industry norms, RBC ensures that its dividend policy resonates with investors' expectations and reflects the stability inherent to the financial sector.

3 Dividends and Dividend Policy at RBC Royal Bank of Canada (RBC) follows a specific approach regarding dividends and their distribution. RBC, a leading financial institution, utilizes dividends to distribute its earnings among shareholders, ensuring preferred dividends take precedence. As a renowned financial institution, RBC, like other corporations, pays dividends to share profits with shareholders. Preferred dividends are paid first, accompanied by closing profits allotted as common-percentage dividends. RBC can maintain some of these as retained profits for reinvestment in its operations or distribute them as dividends to shareholders. Earnings may be made by establishing a compromise between those two opportunities, reflecting the bank's strategic and financial targets. RBC's dividend policy specifies its long-term approach to managing earnings distribution. This coverage examines dividend length, frequency, and shape while considering economic balance, regulatory compliance, and shareholder expectations. Dividends are vital to RBC's economic approach, considering they assist in sustaining investor acceptance as accurate with inventory overall performance and the bank's general monetary fitness. The dividend payout ratio and policy reflect the corporation's excellent fame as a prime financial organization ( Royal Bank of Canada, 2023). RBC's dividend coverage is influenced by its long-standing dedication to offering prices to shareholders while ensuring economic stability. While the precise payout percentage may be exchanged yearly, it usually complies with banking enterprise pointers ( Ross et a l., 2022) . RBC recognizes the importance of paying shareholders a steady and

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4 attractive dividend income as an adequately set-up financial institution. This method is consistent with the historical behavior of mature agencies and banks, which frequently allocate good profits to shareholders. RBC's dividend payments offer investors steady earnings, which adds to the appeal of its stocks as an investment option On the other hand, RBC recognizes the importance of retained earnings in fueling different elements of its business, such as investments in technology, expansion, and other strategic initiatives. As a result, the bank's dividend policy may strike a balance between delivering earnings to shareholders and reserving capital for future growth prospects. This balance is crucial for a financial institution like RBC, which works in a volatile business that requires dividend consistency and the ability to invest in innovation and market development.  Board-Led Strategy: The board of directors strategically formulated RBC's dividend policy, aligning with the company's predefined goals and vision.  Quarterly Dividend Disbursement: Shareholders at RBC can anticipate regular dividend payments, typically made quarterly, ensuring a consistent income stream.  Discretionary Nature: Unlike the non-negotiable interest on debt, dividend distributions are discretionary for RBC. Declining dividends hinge on various factors, including financial performance and outlook.  Investor Confidence: RBC recognizes that failing to declare an expected dividend could undermine investor trust. Such a scenario may also impact the

5 bank's future borrowing capabilities, emphasizing the importance of maintaining a dependable dividend track record.  Homemade Dividend Flexibility: Shareholders at RBC have the flexibility to tailor their cash flow patterns to meet their specific needs. This is achieved by selling portions of their investments, ensuring they can adapt their financial strategies effectively while holding RBC shares.  Transaction and Flotation Costs : like other financial institutions, RBC considers the costs associated with paying dividends (FIN74000 – Fall, 2023). These include transaction and flotation costs that can impact the efficiency of distributing earnings. RBC evaluates how these costs align with its financial strategy to make informed dividend policy decisions.  The Signaling Hypothesis : The signaling hypothesis holds particular importance for RBC. By managing dividend policies effectively, RBC can send signals to investors and the market about its financial health and prospects. Consistent and well-explained dividend changes can positively influence investor confidence and share prices.

6  Clientele Effect : RBC recognizes that its diverse shareholder base has varying dividend preferences. Some investors, such as income-focused shareholders, prefer regular dividend payments, while others may prioritize capital gains. RBC's dividend policy aims to cater to the diverse needs of its clientele to maintain shareholder satisfaction.  Industry Norms : RBC closely observes industry norms for dividend policies in the highly regulated banking industry. Regulations, peer practices, and broader market dynamics may influence these norms. RBC aligns its dividend strategy with these norms to remain competitive and compliant. The Clientele Effect At RBC, they acknowledge that different clientele may form around various dividend payout policies, reflecting distinct investor preferences. Our understanding of the clientele effect shapes our approach:

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7  Individuals in the High Tax Bracket : RBC's zero to low payout stocks can be an attractive choice for investors in this category. These stocks minimize taxable dividend income for shareholders in higher tax brackets.  Individuals in Low Tax Bracket : RBC offers low-to-medium payout stocks, which can be a preferred option for individuals in lower tax brackets. These stocks provide a balance between dividends and potential capital gains.  Tax-Free Institutions : Tax-free institutions, such as pension funds and foundations, often find RBC's medium payout stocks appealing. These stocks align with their tax-exempt status while offering consistent dividends.  Corporations : Corporations typically favor RBC's high payout stocks. This preference is driven by the desire for a substantial dividend income and the potential to meet their financial objectives. At RBC, changing their dividend policy may not create additional value for our shareholders once these clientele have been effectively addressed and satisfied. Their goal is to align their dividend strategy with each clientele's specific needs and expectations, ensuring their continued satisfaction and confidence in RBC's financial decisions. Groups Stocks Individuals in High Tax Bracket Zero to Low payout stocks Individuals in Low Tax Bracket Low-to-Medium payout stocks Tax-Free Institutions Medium Payout Stocks Corporations High Payout Stocks Factors Influencing Dividend Policy

8  Impact of Investor Expectations: The share-price response to RBC's dividend announcements extends beyond the mere declaration of dividends. It is also influenced by investors' expectations regarding these dividend payments.  Influence of Internal Factors: Internal factors, including RBC's historical dividend decisions and investment strategies, significantly shape investor expectations. The consistency and stability of RBC's dividend history play a pivotal role.  Role of External Factors: External factors, such as the broader economic environment, industry conditions, and prevailing interest rates, also shape investors' expectations about RBC's dividend payments (Royal Bank of Canada, 2022). These external factors can affect how shareholders perceive RBC's dividend decisions and their implications. Share Price Reaction to Dividend Announcements:  The share price response following RBC's dividend announcements is contingent upon the variance between actual and expected dividends. The alignment between these two figures directly influences market reactions. Scenarios for RBC's Dividend Announcements  RBC's dividend announcements can yield distinct outcomes based on the market's expectations:

9 As Expected Dividends: If RBC declares dividends that align with investors' expectations, the share price typically remains stable. It's perceived as confirmation of the anticipated dividend policy. Better Than Expected Dividends: When RBC surpasses the expected dividend figures, it often triggers an increase in share price. This reflects investor enthusiasm regarding the more favorable dividend distribution. Worse Than Expected Dividends: If RBC's dividend announcement falls short of expectations, it can decrease the share price ( Royal Bank of Canada, 2023). This reflects potential disappointment among investors who had anticipated a more generous dividend. Royal Bank of Canada (RBC), its dividend decisions are subject to various factors, including:  Legal and Mandated Restrictions (Debt Covenant Restrictions): RBC, like other financial institutions, adheres to legal and mandated restrictions, which can include debt covenant restrictions. These regulations constrain RBC's capacity to distribute dividends beyond specified thresholds. Compliance ensures financial prudence and adherence to regulatory requirements.  Firm Liquidity (Available Cash): RBC's ability to meet its dividend obligations depends on the availability of cash. Maintaining sufficient liquidity is paramount for RBC to deliver dividends to its shareholders consistently. This necessitates effective management of cash flows and the assurance of reliable payouts.

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10  Earnings Volatility (High Volatility on Net Income > Low or No Dividends): The fluctuations in RBC's earnings, mainly when there is high volatility in net income, influence dividend decisions. Such volatility can present challenges in committing to a regular dividend policy. Therefore, RBC might opt for a more conservative dividend approach during unpredictable earnings.  Control (Maintaining Control, Reducing Shareholders, Using Retained Earnings for Projects): RBC may consider how its dividend decisions impact ownership and control as a publicly traded entity. Opting for a policy that retains control within a select group of shareholders, possibly by utilizing retained earnings for strategic projects, may align with the bank's goals and strategies. Dividend Policy in Practice In practice, the Royal Bank of Canada (RBC) may demonstrate a commitment to dividend stability. Still, certain situations may prompt deviations from the regular dividend policy, leading to extra or special dividends being issued.  Extra Dividends: RBC might pay extra dividends to its investors, signaling that this additional distribution might only be a recurring practice if the bank's earnings are notably high and substantiate such payouts ( Ross et a l., 2022) . The term "extra" serves as a precaution to investors, indicating that these payments may not be guaranteed annually.  Special Dividends: Special dividends are possible for RBC, especially when the bank has a substantial cash surplus. This can occur after significant financial events like property sales or divestitures. Additionally, in scenarios where RBC

11 has amassed cash for specific purposes such as acquisitions but later decides to change its strategic direction, it may distribute special dividends to allocate excess funds to its shareholders. These special dividends provide a unique opportunity for investors to benefit from the bank's exceptional financial situation.  At the Royal Bank of Canada (RBC), the choice of dividend coverage aligns with the financial targets and market situations. One of the available options is the Constant Dividend Payout Ratio Policy, a method hired by firms aiming to preserve a steady and predictable dividend distribution to shareholders. Under this coverage, RBC may also pay a set percentage of its profits, offering traders a dependable movement of dividends. For instance, RBC could distribute 30% of its profits as dividends and allocate 70% for internal functions. However, as income varies yearly, the dollar quantity of dividend bills may also fluctuate following RBC's overall monetary performance. This method gives balance and continuity in dividend payments even as being aware of the bank's converting profitability.  On the other hand, the Royal Bank of Canada (RBC) may additionally appoint a Residual Dividend Policy, an approach companies choose to distribute dividends simplest. At the same time, income and cash flows surpass the price range required to finance all investment tasks with zero or nice Net Present Values (NPVs) (Royal Bank of Canada, 2022). This method is favored while RBC can generate a higher return rate on reinvested earnings than buyers can gain independently.

12  By adhering to a residual dividend policy, RBC retains sufficient earnings for profitable reinvestment while allocating any excess to dividends. As a consequence of this policy, dividend payments at RBC may exhibit significant variations from year to year, influenced by fluctuations in earnings and the availability of viable investment projects. This dynamic approach enables RBC to align its dividend distribution with its financial performance and capital allocation priorities. Residual dividend policy In 2022, RBC's common share dividend policy resulted in a dividend payout ratio of 45%. This means that 45% of their profits were dividends given to shareholders. In the same year, RBC declared $4.96 in dividends per share, a 15% increase from 2021. They paid out $7 billion in common share dividends (Royal Bank of Canada, 2022). Residual Dividend Policy in Practice In practice, RBC's adoption of a residual dividend policy is driven by the strategic consideration of internal investment opportunities. If the bank can generate more profitable returns on its available funds by investing them in internal projects, it will prioritize these investments over distributing dividends. When RBC follows a residual dividend policy, its approach involves the following steps: Determine Investment Funding Needs: RBC evaluates the capital required for approved investment projects within the organization.

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13 Optimal Debt-Equity Mix: The bank calculates the appropriate mix of debt and equity needed to fund these new investments. The goal is to ensure the capital structure aligns with RBC's strategic targets. Utilize Retained Earnings: RBC seeks to finance the equity portion of these projects primarily through retained earnings, thereby optimizing the use of internal resources. Positive Residual Amount: Dividends are paid to shareholders only when a positive residual amount remains after funding these investments ( Ross et a l., 2022) . If retained earnings are sufficient to cover the equity needs for projects and maintain regulatory capital requirements, dividends are distributed to shareholders. The constant dollar dividend policy is a preferred approach for RBC when the aim is to provide shareholders with a stable and predictable stream of dividend payments. This policy emphasizes the following key points:  Fixed-Dollar Payments: RBC commits to delivering a predetermined dollar amount in dividends consistently, irrespective of fluctuations in earnings. This predictability appeals to shareholders seeking dependable income from their investments.  Stability in Dividends: Shareholders value the stability of dividend payments. RBC's adherence to this policy demonstrates its commitment to maintaining a regular dividend schedule, aiming to avoid abrupt changes in dividend amounts.

14  Resilience in Payments: Even when RBC's earnings temporarily fall below the level required to support the designated dividends, the bank typically refrains from cutting dividend payments. Instead, it may borrow or issue new equity to fulfill its commitment to shareholders. Stock dividends Stock dividends represent a financial strategy RBC may employ to manage its capital structure and reward shareholders. This approach entails the following key elements:  No Cash Outflow : Stock dividends are characterized by the absence of a cash outflow from the firm. Instead of distributing cash to shareholders, RBC reallocates its retained earnings by issuing additional shares to investors.  Increased Shares Outstanding: RBC effectively augments the total number of shares in circulation through stock dividends. This adjustment may offer benefits such as improving market liquidity and share price stability.  Stock Splits: Stock splits are a more substantial version of stock dividends. Each existing share is divided into multiple shares in a stock split, effectively lowering the price per share. RBC might consider this option to manage its share price and enhance accessibility for retail investors. Repurchase of Stock Share repurchase, regularly known as stock buybacks, has emerged as a significant and strategic approach for RBC to distribute profits to its shareholders ( Ross et a l.,

15 2022) . This technique aligns with RBC's commitment to enhancing shareholder value and offers several outstanding benefits:  Managing Excess Cash: RBC can use share repurchases to utilize extra coins effectively. Rather than hoarding cash reserves, the bank can return capital to its shareholders by shopping for its stocks again. This method guarantees that surplus budgets are actively hired.  Enhancing Shareholder Value: Share repurchases can bolster the value of RBC's shares. Each last percentage turns into extra valuable while the range of tremendous shares is decreased through repurchases. This can lead to increased investor self-belief and a tremendous impact on proportion performance.  Tax Efficiency: Share repurchases frequently benefit the organization and its shareholders. Capital profits taxes are usually more favorable than taxes on dividend income. RBC can optimize its capital allocation approach by employing percentage repurchases while considering the firm's and its investors' tax implications. Complete Calculation Problem Appendix 7: Dividends Part A: Debt and Equity To maintain the current debt to equity of 40:60, the company will have to finance the new projects 40% by debt and 60% by equity after partially funding from the retained profits after paying dividends. In this case, $770,000 will be financed from the profits retained after paying the dividends. From the remaining $530,000 financing

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16 requirement, 40% will be financed from debt i.e., $212,000, and 60% will be paid from equity i.e., $318,000. Cost of New Projects 1,30 0,000 Debt to Equity 40:60 Annual Income 1,10 0,000 Dividends Paid (33 0,000) Retained Profits 7 70,000 Financing from Retained Profits 7 70,000 Remaining Financing Requirement 5 30,000 Debt 40% 2 12,000 Equity 60% 3 18,000 There are various ways to raise debt and equity financing. To raise equity financing, the company can issue new shares to its current shareholders through a rights issue, which gives an option to the current shareholders of the company to purchase new or additional shares (Sasso, 2013). On the other hand, debt financing can be raised by raising term loans from a single bank or a syndicate of different banks (Sasso, 2013).

17 Part B: Dividend Policy The company is currently following a constant dividend policy by paying a fixed portion of its yearly earnings to the investors i.e., having a fixed dividend payout ratio of 30%. In a constant dividend policy, dividends vary with varying levels of profit and investors experience full levels of volatility in earnings (Baker, 2009). In the fiscal year , the company will pay a total of $330,000 in dividends by following its current dividend policy. Annual Income 1,10 0,000 Dividend Payout Ratio 30% Dividend Payment for the Fiscal Year 3 30,000 There are two other dividend policies that the company can follow apart from the constant dividend policy which are the stable dividend policy and the residual dividend policy. In a stable dividend policy, a steady and predictable dividend is paid to the investors each year, which most of the income-oriented investors seek (Baker, 2009). In this policy, investors get dividends, irrespective of the earnings. On the other hand, in the residual dividend policy, the company pays dividends from the remaining profits after all capital expenditures (CAPEX) and working capital needs for the next year. This approach to paying is volatile but it makes more sense for the growing companies who have higher CAPEX and working capital needs (Baker, 2009). Part C: Maximum Capital Budget If the company decides to pay no cash dividends in the year, it can finance $1.1 million of capital spending from the retained profits, and from the remaining $200,000, 40%

18 must be financed by the debt and 60% by the equity to maintain the current capital structure. In this case, the company will raise $80,000 in debt to maintain its current capital structure. Cost of New Projects 1,30 0,000 Debt to Equity 40:60 Annual Income 1,10 0,000 Dividends Paid - Retained Profits 1,10 0,000 Financing from Retained Profits 1,10 0,000 Remaining Financing Requirement 2 00,000 Debt 40% 80,000 Equity 60% 1 20,000 A change in dividend policy, i.e., paying no cash dividends may send a negative signal in the market that the company might be having cash problems and that is why it be unable to pay the dividends and hold up to its dividend policy. This can create negative sentiment in the market about the reputation of the company and can also impact the market price of shares (Liao, Lin, Li, & Chih, 2022), as well.

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19 Part D: Non-Cash Dividend Alternatives An alternative to paying cash dividends is paying stock dividends to the shareholders. In stock dividends, companies give new shares to the existing shareholders. Companies can choose to pay stock dividends instead of cash dividends due to the shortage or lack of availability of liquid funds and cash in the company. Growing companies that have large capital spending often choose to pay stock dividends instead of cash dividends (Lowe, 2021). However, there are pros and cons attached to both types of dividends. Cash dividends have high tax implications for the shareholders i.e., tax rates to be paid on the dividends are often very high. For stock dividends, shareholders do not have to pay taxes. Furthermore, stock dividends cause the total number of shares of the company to increase. In this case, to allow the total market capitalization of the company to remain at the same level, the price per share of the company decreases or is adjusted downwards (Lowe, 2021). However, share prices are not affected by the cash dividends. In addition, another key benefit of the stock dividend is that shareholders can choose to keep the shares to make more money in the future or can also sell the shares to immediately earn a return on the new shares issued (Baker, 2009). In this case, the company can choose to pay stock dividends instead of cash dividends to reinvest the cash into the capital project opportunities available to the company. An Overview of the Dividend Policy from Financial Results/News/Updates TORONTO, Aug. 24, 2023 - Royal Bank of Canada (RY on TSX and NYSE) announced today that its board of directors has declared a quarterly common share dividend of

20 $1.35 per share, payable on and after November 24, 2023, to common shareholders of record at the close of business on October 26, 2023. The board also declared dividends for the following Non-Cumulative First Preferred Shares, payable on and after November 24, 2023, to shareholders of record at the close of business on October 26, 2023.  Series AZ Dividend No. 39 of $0.23125 per share.  Series BB Dividend No. 38 of $0.228125 per share.  Series BD Dividend No. 35 of $0.20 per share.  Series BF Dividend No. 34 of $0.1875 per share.  Series BH Dividend No. 33 of $0.30625 per share.  Series BI Dividend No. 33 of $0.30625 per share.  Series BO Dividend No. 20 of $0.30 per share. The board also declared dividends for the following Non-Cumulative First Preferred Shares.  Series C-2, Dividend No. 32 of US$16.875 per share (equivalent to US$0.421875 per related depositary share), payable on and after November 7, 2023, to shareholders of record on October 27, 2023. Instead of receiving their dividends in cash, holders of the Bank's common and preferred shares who reside in Canada and holders of common shares who reside in the United States may elect to have their dividends reinvested in additional common shares of the Bank, by the Bank's Dividend Reinvestment Plan (the "Plan").

21 Under the Plan, the Bank is entitled to determine whether the additional common shares are purchased in the secondary market by the agent for the Plan or issued from the Treasury. As previously announced and until further notice, the Bank has decided to issue additional shares from the Treasury at a 2% discount on the Average Market Price (as defined in the Plan). Shareholders who currently participate in the Plan and who continue to do so on the November 24, 2023, payment date will automatically have the discount applied to the reinvestment of their dividends. Registered holders of record residing in Canada or the United States who wish to participate in the Plan can obtain an enrollment form from the Bank's Plan agent, Computershare Trust Company of Canada, from their website at www.investorcentre.com/rbc , or by calling 1-866-586-7635. Eligible, beneficial, or non- registered holders of the Bank's common and preferred shares must contact their financial institution or broker if they wish to participate in the Plan. To participate in the Plan in time for the November 24, 2023, dividend payment date, enrollment forms from registered holders must be received by Computershare Trust Company of Canada at 100 University Avenue, 8th Floor, Toronto, Ontario M5J 2Y1 before the close of business on October 26, 2023. All shareholders considering enrollment in the Plan should carefully review the terms of the Plan and consult with their advisors as to the implications of enrollment in the Plan. Registered participants in the Plan who would prefer to receive a cash dividend rather than reinvest their dividends on and after November 24, 2023, may terminate their participation in the Plan by delivering written notice to Computershare Trust Company of

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22 Canada at the above address by no later than October 26, 2023. Beneficial or non- registered participants in the Plan should contact their financial institution or broker in advance of October 26, 2023, for instructions on how to terminate participation in the Plan so that the November 24, 2023, dividend is not reinvested in common shares Reference: https://www.rbc.com/newsroom/news/article.html?article=125821 Type of Dividend Strategy 1. Cash Dividends: RBC has issued a quarterly dividend of $1.35 per share in ordinary shares. Some Non-Cumulative First Preferred Shares have also been declared for dividends, with different dividend amounts for each series. 2. Dividend Reinvestment Plan (DRIP): Through the DRIP, common and preference shareholders in Canada and common shareholders in the US can reinvest their dividends in more common bank shares. The Bank grants a 2% discount from the Average Market Price for shares issued from the Treasury under the DRIP. As previously indicated and indefinitely, the Bank has chosen to issue more Treasury shares at a 2% discount on the Average Market Price. If a shareholder is now a part of the DRIP and stays so on the November 24, 2023, payment date, the discount will be automatically applied to the dividend reinvestment. 3. Enrollment and Termination of DRIP: An enrollment form for the DRIP is available from the Bank's Plan agent for shareholders who would like to participate. To be eligible for the DRIP for the November 24, 2023, dividend payment date, registered holders must submit their

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23 enrollment forms to Computershare Trust Company of Canada by October 26, 2023, at the latest, before the close of business. If a DRIP shareholder would rather receive a cash dividend, they may withdraw from the program by sending a written notification no later than October 26, 2023. RBC offers a DRIP that enables owners to reinvest their dividends in more common shares while receiving a 2% discount from the average market price for shares issued under the DRIP. The company combines cash dividends with this program. This approach allows shareholders to reinvest their dividends in the Bank's common shares or receive cash dividends. Reference: https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf The Uses of the Current Dividends Policy 1. Stability and Health of the Finances: A company's financial standing frequently affects its dividend policy. If RBC maintains steady and reliable cash flows, it could feel more comfortable committing to ongoing dividend payments. 2. Value to shareholders: Dividends are a means by which businesses provide value back to their shareholders. Enhancing shareholder loyalty and drawing in income-focused investors are two benefits of a steady and increasing dividend. 3. Technique for Allocating Capital:

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24 An essential part of a business's capital allocation plan is its dividend policy. Companies have to balance keeping money for internal expenditures, acquisitions, and other development prospects and giving cash back to shareholders. 4. Market circumstances: A company's dividend decisions may be impacted by market circumstances, interest rates, and economic situations. For instance, businesses could be more cautious about paying dividends when the economy is uncertain. 5. Competitive Alignment: An industrial company's competitive posture may be impacted by its dividend policy. RBC might stand out from its competitors and draw in income-seeking investors if it offers a stable and appealing dividend yield. 6. Tax-related Aspects: Tax consequences are something that companies and shareholders may take into account when creating or taking part in dividend reinvestment schemes. The way dividends are taxed can sometimes have an impact on how appealing a DRIP is. 7. Preferences for Investors: Businesses frequently modify their dividend policy to reflect the desires of their shareholder base. For example, RBC may select a dividend strategy that appeals to investors looking for income if it has a sizable proportion of these investors. 8. Adaptability and Flexibility:

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25 Businesses can create flexible dividend programs to accommodate shifting conditions. Companies can adapt to changes in the business environment and preserve financial flexibility by modifying their dividend policy. 9. Legal and Regulatory Considerations: Legal and regulatory variables can influence the form of dividend policy firms. Decisions on capital management may be affected by the many regulatory requirements that financial institutions must comply with. Reference: https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Historical information about the dividend policy From 2020 onward, the Royal Bank of Canada has been maintaining or increasing its dividend payout. As shown in the chart below, provided by DividendHistory.org ( https://dividendhistory.org/payout/TSX/RY/ )

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26 Data Visualizations related to dividend policy Source: YCharts, https://ycharts.com/companies/RY.TO/dividend

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27 Source: Royal Bank of Canada, 2022 Annual Report, https://www.rbc.com/investor- relations/_assets-custom/pdf/ar_2022_e.pdf

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28 Source: RBC Share Information, https://www.rbc.com/investor-relations/share- information.html#common-content Conclusion Royal Bank of Canada (RBC) has a dividend policy that is influenced by several factors and plays a crucial role in its financial strategy. These factors include stability, industry norms, and the clientele effect, which help tailor dividend offerings to meet the preferences of several types of shareholders: 1. Stability: RBC places a high emphasis on maintaining a stable dividend policy. Consistency in dividend payments sends positive signals to investors, potentially increasing share prices. RBC may even borrow money to avoid reducing dividends during short-term underperformance. 2. Industry Norms: RBC aligns its dividend policy with industry norms, particularly in the financial sector. Stability in earnings is crucial, and RBC aims to provide a consistent dividend policy in line with banking industry standards. 3. Clientele Effect: RBC recognizes the diverse preferences of its shareholders and tailors its dividend policy accordingly based on tax considerations and income objectives. Several types of shareholders are accommodated:  Shareholders in a high tax bracket receive low-to-zero payout stocks to minimize taxable dividend income.  Shareholders in a low tax bracket receive low-to-medium payout stocks to balance dividends and capital gains.  Tax-free institutions prefer medium payout stocks that align with their tax- exempt status.

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29  Corporations favor high payout stocks for substantial dividend income. Impact of Dividend Policy: The company's dividend policy significantly influences share price reactions to dividend announcements. If RBC declares dividends as expected, share prices remain stable. Surpassing expectations leads to an increase in share prices, while falling short may cause a decrease, reflecting investor sentiment. Factors Influencing Dividend Policy: 1. Legal and Mandated Restrictions (Debt Covenant Restrictions): RBC adheres to regulations that restrict dividends beyond specified thresholds, ensuring financial prudence and compliance. 2. Firm Liquidity (Available Cash): RBC's dividend capacity depends on the availability of cash, necessitating effective cash flow management. 3. Earnings Volatility: High earnings volatility influences dividend decisions, leading to a more conservative approach during uncertain earnings. 4. Control: Dividend decisions impact ownership and control, aligning with RBC's strategic objectives and financial goals. Dividend Policy in Practice: RBC implements different dividend policies such as the Constant Dividend Payout Ratio Policy and the Residual Dividend Policy. Special dividends and extra dividends are paid based on earnings and cash availability. In 2022, the common share dividend policy resulted in a 45% dividend payout ratio and $7 billion in common share dividends.

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30 RBC's dividend policy is consistent with industry practice and exhibits adaptability to cater to the diverse preferences of its shareholders. The company places a strong emphasis on maintaining stability, aligning with industry norms, and meeting tax and income objectives for its shareholders. The impact of its dividend policy on share prices is closely monitored, and numerous factors influence dividend decisions. The company successfully manages a balance between meeting investor expectations, ensuring financial stability, and efficiently managing its capital.

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31 References Baker, H. K. (2009). Dividends and Dividend Policy. USA: Wiley. Dividend History. (n.d.). Royal Bank of Canada Dividend History. Retrieved from, https://dividendhistory.org/payout/TSX/RY/ FIN74000 - Fall 2023 - Ross 9ce Ross (CDN), Corporate Finance, 9ce ( ) Instructor Anna Czegledi Ross (CDN), Corporate Finance, 9ce section FIN74000 - Fall 2023 - Section 1&2 Stacked Liao, W.-J., Lin, Y.-E., Li, X.-Z., & Chih, H.-H. (2022). The Effects of Behavioral Foundations and Business Strategy on Corporate Dividend Policy. Frontier in Psychology . Lowe, M. (2021). Dividend Investing: Simplified - The Step-by-Step Guide to Make Money and Create Passive Income in the Stock Market with Dividend Stocks. USA: Alakai Publishing LLC. Ross, S. A., Westerfield, R., Jaffe, J. F., Roberts, G. S., & Driss, H. (2022). Corporate finance. Toronto: McGraw-Hill Ryerson Limited. Royal Bank of Canada. (2022). Royal Bank of Canada Annual Report 2022. Retrieved from, https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Royal Bank of Canada. (2023). Royal Bank of Canada (RY) financial ratios. Retrieved from, https://ca.investing.com/equities/royal-bank-of-canada-rbc-ratios Royal Bank of Canada. (2023). Share Information. Retrieved from, https://www.rbc.com/investor-relations/share-information.html#common-content

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32 Sasso, L. (2013). Capital Structure and Corporate Governance: The Role of Hybrid Financial Instruments. New York: Wolters Kluwer. Y Charts. (n.d.). Royal Bank of Canada Dividend. Retrieved from, https://ycharts.com/companies/RY.TO/dividend

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Integrated Project Part 4 - Dividend Policy (1)

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