2 Stocks That Should Be in Every Dividend Portfolio

Take a closer look at why Fortis Inc. (TSX:FTS) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) should be core holdings in every income-focused portfolio.

| More on:
The Motley Fool

It has been a tough year for dividend investors as many of Canada’s one-time dividend darlings, gutted by the sharp collapse in oil prices, were forced to savagely slash their dividends in order to survive. This shouldn’t deter investors from dividend investing because it is one of the best means of achieving financial independence if investors select the right stocks.

Two stocks that I believe stand out are Fortis Inc. (TSX:FTS) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI).

Now what?

You see, both possess a unique characteristic that protects their competitive advantage. This is their wide economic moat because they operate in heavily regulated industries that require considerable capital investment in order to commence business. This, coupled with the essential nature of the products and services that they provide, virtually guarantees earnings growth.

Electric utility Fortis is a stock that I consider to be one of Canada’s best dividend-growth champions. Its wide economic moat and the inelastic demand for electricity (it is an essential part of modern economic activity) virtually guarantees earnings growth over time. This has allowed it to hike its dividend for the last 41 years straight, giving it a tasty yield of almost 4% that, more importantly, remains sustainable with a payout ratio of less than 100%.

Furthermore, Fortis is able to maintain this solid streak of dividend hikes with its earnings set to grow because it is focused on acquiring quality power-generating assets. This includes the 2014 acquisition of Arizona-based UNS Energy Corp., which has given it considerable exposure to the resurgent U.S. economy. It has also expanded its Canadian and Caribbean operations, which will boost revenues and profitability when those economies start to recover.

Canadian National operates Canada’s only transcontinental railway network that extends all the way to the U.S Gulf Coast, giving it the ability to benefit from the U.S. economic recovery.

It is also well positioned to weather the headwinds the bulk freight and railways industries are currently facing. This is because, relative to its peers, it has a smaller proportion of its freight volumes made up commodities like coal, which are experiencing sharp declines in demand because of a weak global economy.

Impressively, despite the rout in crude, volumes of petroleum products transported for the first quarter 2015 shot up by 2% and metals rose by 14% even though global demand for metals is in decline. This striking performance bodes well for its ability to continue its already impressive dividend-payment history.

After commencing dividend payments in 1996, Canadian National has hiked its dividend every year since then to give it a yield of 1.7%. While this yield may not impress investors, its compound annual growth rate of 17% certainly should. This solid rate of growth indicates that an investor’s income from Canadian National will accrue in value over time at a far greater rate than inflation, or even other purportedly superior income investments such as government bonds.

So what?

Both stocks yields may not be particularly exciting, but high yields typically indicate a higher degree of risk, with those dividend payments potentially unsustainable during times of economic stress as witnessed after the oil crash. When taking this into consideration, Fortis and Canadian National have impressive dividend histories that make them both core holdings in any income-focused portfolio.

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 Matt Smith has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »