Market corrections give investors a chance to buy stocks at a discount. In times of volatility, it makes sense to consider industry leaders with long track records of delivering dividend growth and attractive total returns.
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CN Rail
CN (TSX: CNR) became a publicly traded company in the 1990s. Since then, the board has steadily increased the dividend, with a compound annual dividend-growth rate of about 15%. That’s the kind of reliability investors want to see when picking a stock to add to their Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolios.
CN generated record results in the second quarter (Q2) of 2022. Demand for transportation of raw materials and finished goods continues to expand, and the positive trend is expected to continue, even if the economy drops into a recession next year. CN moves coal, crude oil, grains, fertilizers, forestry products, automobiles, and finished goods.
The company’s revenue increased by 21% in Q2 compared to the same period last year. Adjusted diluted earnings per share jumped 30% to $1.93. CN’s adjusted operating ratio fell 2.6 points to 59%. This means the business became more efficient, as it measures operating expenses as a percentage of revenues.
Management reaffirmed guidance for the 2022 financial results. CN expects adjusted diluted earnings per share to rise 15-20% for the year, and free cash flow is expected to be $3.7 billion to $4.0 billion. That should support a generous dividend increase in 2023 as well as ongoing share buybacks.
CN stock trades near $150 at the time of writing compared to $170 earlier this year. A $10,000 investment in CN shares 25 years ago would be worth about $380,000 today with the dividends reinvested.
Royal Bank
Royal Bank (TSX: RY) is a top-10 global bank by market capitalization and Canada’s largest financial institution.
The company made it through the pandemic in good shape, generating $16 billion in profits in 2021 and a strong return on equity of 18.6%. Royal Bank’s first two quarters of fiscal 2022 came in better than the previous year. The fiscal Q3 results slipped due to a rough quarter in the capital markets segment.
Overall, Royal Bank is on track to deliver another strong year, and investors should see a decent dividend increase for fiscal 2023. Royal Bank increased the payout by 11% after all the banks received the green light to start raising dividends again after the temporary ban during the pandemic. Royal Bank then hiked the distribution by another 7% when the bank reported the fiscal Q2 2022 results.
The stock looks oversold at the current price near $121 per share. Royal Bank traded above $149 at one point this year but has pulled back due to rising recession fears. The Bank of Canada is raising interest rates in an effort to cool off the economy and bring down inflation. The surge in borrowing costs is going to put businesses and households with high debt levels in a tough spot. Bankruptcies are expected to increase and loan growth will likely slow down. This will put pressure on bank earnings, but the selloff in the sector now appears overdone.
Investors who buy Royal Bank stock at the current level can pick up a 4.2% dividend yield. Long-term investors have done well buying RY stock on big dips. A $10,000 investment in Royal Bank shares 25 years ago would be worth about $165,000 today with the dividends reinvested.
The bottom line on top dividend stocks to buy now
CN and Royal Bank are leaders in their industries and have strong businesses that should easily ride out the next economic downturn. If you have some cash to put to work in a TFSA or RRSP, these stocks look attractive right now for a buy-and-hold portfolio.
