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2 Stocks That Should Be in Every Dividend Portfolio

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.

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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.

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