These dividend stocks tend to outperform during periods of economic expansion, which is the period we are in right now. Let’s take a closer look at these popular dividend-growth stocks to see if they’re still good buys today.
Canadian National Railway
Canadian National Railway (TSX:CNR)(NYSE:CNI) has been a relatively stable industrial stock through economic cycles. During the pandemic last year, it still generated revenues of $13.8 billion and free cash flow of $3.2 billion. That is, revenue was down only about 7%, and it only needed about half of its free cash flow for its dividend.
Its operating ratio (operating expenses as a percentage of revenue) was a little high at 65.4% in 2020 versus the high-50s to low-60s range since 2014. However, adjusted earnings were still resilient — falling only 8% on a per-share basis. Additionally, it generated strong returns on equity of about 19%.
The company is a defensive investment for multiple reasons. First, the railroad company provides essential transportation services in North America. Its network of about 31,500-km network spans Canada and Mid-America, connecting three coasts: the Atlantic, the Pacific, and the Gulf of Mexico.
Second, CN Rail and its peer Canadian Pacific Railway are the only class I railways listed on the TSX. There are seven in North America. This categorization implies they’re large in scale and, on average, more fuel efficient than transportation by truck.
Third, CN Rail is a Canadian Dividend Aristocrat with 25 consecutive years of dividend increases with a three-year dividend-growth rate of 11.7%. With a well-covered dividend and growing earnings, the quality dividend stock will set new records of dividend payments in the future.
The stock yields 1.7% and appears to be fully valued. But it could be a reasonable buy after an extended period of consolidation or on meaningful dips of +15%.
Last year around this time, I wrote that Magna International (TSX:MG)(NYSE:MGA) was a dirt-cheap dividend stock to buy. Since then, the cyclical stock has appreciated 76%. Is the dividend-growth stock too expensive now?
The stock has actually moved ahead of earnings. After a couple of years of declines in revenues and earnings (particularly, last year during the pandemic), the company is expected to make a huge comeback this year.
Specifically, management estimates sales of about US$40.8 billion, which would be an increase of about 25%. It also forecasts the adjusted EBIT margin to expand from 5.1% to approximately 7.3%. In other words, the market is expecting Magna’s revenue and earnings to surge in 2021. Moreover, management expects further growth and margin expansion through 2023.
With this positive outlook, Magna stock actually appears to be undervalued on a forward basis. At about $112 per share, it trades at a forward price-to-earnings ratio of about 11.8, while earnings per share could be growing north of 15% per year through 2023.
Keep in mind that Magna also pays a growing dividend. It has a dividend-growth streak of 11 years with a five-year dividend-growth rate of 12.7%.
The Foolish takeaway
Stock price movements are often forward looking. Right now, between the two popular dividend stocks, Magna appears to be a better buy for total returns through 2023. That said, if CNR stock consolidates for a few more months or dips meaningfully, it could also be a great buy for total returns.
Before you buy Magna, also consider these great stocks to see if they're a better fit for your 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 Kay Ng has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway and Magna Int’l.