Starting a dividend-growth portfolio can be a stressful event. In fact, putting thousands of your hard-earned dollars into an investment can be downright scary.
Most people would prefer to get yield from GICs or Canada Savings Bonds, but the days of big interest payments are long gone, and investors pretty much have to turn to dividend-paying stocks to get decent returns.
Up until a year ago, many investors relied on energy stocks for this yield, but the bloodbath in the oil market has wiped out most of those stocks and their dividends.
So, where should new investors turn in the current environment?
The best stocks to buy are ones that have long histories of dividend growth and capital appreciation. Ideally, they hold leadership positions in their industries and have wide economic moats.
With this thought in mind, I think young investors should consider BCE Inc. (TSX:BCE)(NYSE:BCE) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI).
BCE
BCE is insulated from the craziness of the global economy and enjoys a dominant position in a market with very little serious competition.
The company is not only a telecom powerhouse, it also owns a wide array of valuable media and retail assets in the Canadian market. This dominance of the value chain puts BCE in a great position to grow its revenue stream while protecting its turf against any possible newcomers to the market.
The company grew year-over-year earnings in the second quarter by a healthy 5%. Free cash flow, which is a key determiner of potential dividend increases, grew by 8%.
BCE plans to invest up to $20 billion in its world-class network over the next five years as the company expands its fibre-to-the-home service. This will put even greater distance between BCE and its competitors.
BCE pays an annualized dividend of $2.60 per share that yields about 4.5%.
Canadian National Railway
Canadian National Railway is often cited as the best-run railway in North America. The company continues to deliver strong earnings despite facing economic headwinds in Canada.
In its Q2 2015 earnings statement, Canadian National Railway reported net income of $886 million, a 5% increase over the same period last year. Operating income rose 8% and adjusted earnings per share increased by 12%.
The company does a great job of managing its costs. The operating ratio in the second quarter was 56.4%, down impressively from and already low 59.6% in Q2 2014. A low number is desirable because it indicates the amount of revenue the company is using to run the business.
Canadian National Railway raised its quarterly dividend by 25% earlier this year to $0.3125 per share. That’s good for a 1.6% yield. Investors shouldn’t balk at the low yield because the company increases the payout on a regular basis and the stock has appreciated significantly over the years.
If you want a stock with a wide competitive moat, Canadian National Railway is about as good as it gets.
