Dividend-growth stocks are probably one of the best ways for younger investors to fund their future retirement funds. Indeed, upfront yields are nice to have, especially if you need some passive income (dividends and distributions) over the near term. That said, if you don’t need dividends anytime soon and would rather invest in cash flow-generative companies that can raise the bar on their payouts consistently, dividend-growth stocks may be more intriguing than some of the pure growth stocks, especially these days.
Profits matter. And they’ll matter even more once the Fed or Bank of Canada finally start raising rates. It’s inevitable that rates move higher from here and the damage done to some of the high-flying growth stars seems warranted. Indeed, the damage on some top growth stocks may be overdone here, but at the same time, many growth stocks that won’t make a profit anytime over the next decade may deserve to take a further hit to the chin. Undoubtedly, growth stocks are tough to value. With rates rising, they’re up against it. Add the potential for competition into the equation, and they’re falling knives that may not be worth catching just yet.
The case for top dividend-growth stocks over growth stocks
Some of the best profitable growth stocks are dividend-growth stocks. They generate enviable amounts of profit and can balance returning cash back to shareholders with long-term growth initiatives. Indeed, a track record of annual dividend hikes can be a sign of a truly great company with a wide economic moat.
Though many dividend-growth stocks don’t have huge upfront yields, the yield on your invested principal will get larger every single year there’s a dividend hike. In 10 or 20 years, it’s that yield that could swell above and beyond the yields offered by some of the lower-growth high-yielders today. In the end, it’s about balancing dividends and growth. Few do it better than dividend-growth stocks. In this piece, we’ll look at one that looks too cheap going into March.
CN Rail: A new CEO; Room for improvement
CN Rail (TSX: CNR)(NYSE: CNI) is one of the best dividend-growth studs on the TSX. Yet you won’t hear much excitement about it in the mainstream financial media. The business is old-fashioned. It’s little changed over the years and is not a disruptor by any means. Still, in an era where reducing emissions is vital, CN and the rail group will prosper.
With a new CEO at the helm and room to expand upon margins on the other side of this pandemic, I believe CNR stock is a great long-term hold. The company has rewarded investors with solid dividend hikes every year and is en route to becoming one of the most powerful Dividend Kings out there. Indeed, the dividend yield isn’t remarkable at 1.86%. Over 10 years, though, investors can enjoy watching their dividends (and yield based on their principal) grow with time. All the while, capital gains can be expected in a slow and steady fashion.
Simply put, CN stock is an oldie but a goodie. In 2022, I’d look for the new top boss to drive the operating ratio to more attractive levels. There’s room for the new CEO to work, and I think they’ve got the tools to make CN Rail the best that it can be.
