Canadian investors are searching for ways to save some serious cash to help them enjoy a comfortable retirement.
One popular strategy involves buying dividend-growth stocks inside a TFSA and investing the distributions in new shares. This sets off a powerful compounding process that can turn relatively small initial investments into impressive savings over time.
CN is the only rail operator in North America with tracks connecting three coasts. The advantage is an important one, and fortunately for investors, things will likely stay that way.
The odds of new tracks being built along the same routes are pretty slim, and merger attempts between railways tend to run into regulatory roadblocks.
CN still has to compete with trucking companies and other railways on some routes, so management is investing heavily to ensure CN remains competitive and can handle growing demand for its services. This year, the company has announced orders for 1,000 new grain hopper cars, 350 new box cars, and 350 new lumber cars. In addition, CN is putting 60 new locomotives in service and is investing in track upgrades and yard expansions.
In total, the 2018 capital plan is set at $3.4 billion.
Investors continue to receive generous dividend increases. CN raised the payout by 10% for 2018 and has a compound annual dividend-growth rate of 16% over the past 22 years.
Long-term investors have enjoyed impressive returns. A $10,000 investment in CN two decades ago would be worth $200,000 today with the dividends reinvested.
Fortis owns natural gas distribution, power generation, and electric transmission businesses in Canada, the United States, and Mexico.
The company has grown over the years through strategic acquisitions, including the 2014 purchase of Arizona-based UNS Energy for US$4.5 billion and the 2016 takeover of Michigan-based ITC Holdings for US$11.3 billion.
Organic developments have also helped the company grow, and investors should see the company capitalize on additional opportunities in the coming years, including the ITC Lake Erie Connector Project and gas infrastructure expansion at FortisBC. The company currently has a five-year $15.1 billion capital program in place that should boost the rate base to $33 billion through 2022.
As a result, management expects cash flow to improve enough to support annual dividend growth of at least 6% over that time frame. The stock currently provides a 4% yield.
Investors should feel comfortable with the guidance. Most of the company’s revenue comes from regulated assets, and Fortis has raised its payout every year for more than four decades.
A $10,000 investment in Fortis 20 years ago would be worth about $80,000 today with the dividends reinvested.
The bottom line
There is no guarantee CN and Fortis will generate the same returns over the next two decades, but the companies remain attractive TFSA picks, and the strategy of buying quality dividend-growth stocks and investing the distributions in new shares is a proven one.