Canadians are searching for top dividend stocks to help them meet their retirement goals.
CN continues to generate solid earnings despite a slowdown in the North American railway sector.
The company reported Q2 2016 net income of $858 million, or $1.10 per share. That’s pretty close to the results from the same period last year.
Revenue dropped in most of the company’s business segments, which is common during slow times in the economic cycle, but the bottom-line numbers are actually quite good.
The reasons for the steady performance lie in the company’s improved efficiency and a strong U.S. dollar.
CN is widely viewed as the best-run company in the rail industry, and management continues to lower the operating ratio. The metric is important because it indicates the company’s expenses as a percentage of revenue. In a nutshell, CN is spending less to generate sales, and that is helping margins.
On the currency side, the company gets a significant amount of its income south of the border. As such, a strong greenback helps drive earnings higher when converted to Canadian dollars. At the moment, each dollar of profit coming from the U.S. converts to about CAD$1.30.
What’s the attraction today?
Dividend investors are always focused on free cash flow because that’s the money companies should be using to pay the distributions. CN generated $1.17 billion in free cash flow during Q2, which is up from $1.05 billion in the same period last year.
Management raised the dividend by 20% in early 2016, and investors have enjoyed average annual dividend growth of about 17% over the past two decades.
What about returns?
A $10,000 investment in CN just 15 years ago would be worth $106,000 today with the dividends reinvested.
Fortis is an electricity generation and natural gas distribution company with assets located in Canada, the United States, and the Caribbean.
The company has a strong track record of driving growth through strategic acquisitions.
Two years ago Fortis spent US$4.5 billion to purchases Arizona-based UNS Energy. The integration of the assets went well, and the added revenue stream helped support a 10% increase in the dividend last fall.
Now Fortis is spending US$11.3 billion to buy ITC Holdings Corp., the largest independent electric transmission company in the United States. The deal is expected to close before the end of the year, and investors should see a boost to revenue in 2017.
Fortis gets 94% of its revenue from regulated assets. This means cash flow should be both predictable and reliable. When it comes to dividends, that’s music to an investor’s ears.
Fortis has raised its distribution every year for more than four decades, and investors should see annual growth of about 6% in the coming years. The current payout offers a yield of 3.5%.
A $10,000 investment in Fortis 15 years ago would now be worth $91,000 with the dividends reinvested.
Is one a better bet?
Both CN and Fortis are strong long-term holdings for an RRSP account.
Fortis has enjoyed a nice rally this year, so I would probably give the edge to CN today. The railway operator has a stronger dividend-growth rate and probably offers better upside potential in the medium term.