Canadians seeking passive income may not be considering everything when it comes to discovering the best dividend stock for their income dreams. And I mean beyond considering dividend income as well as returns for passive income.
What investors will need to consider is growth, not just the share price. Instead, we need to consider it all — value and momentum. And there’s a stock that has seen 23% in returns in the last year that offers enough value for even more growth in 2024. So, let’s get into it.
Value
What makes a dividend stock valuable comes down to a few factors. First, there is the obvious dividend yield. If the dividend yield is higher than average, that can mean the share price is attractive.
Investors should value dividend stocks with stable and predictable cash flows. Companies operating in defensive sectors, such as utilities, consumer staples, and healthcare, tend to have more stable earnings and can sustain dividends even during economic downturns.
Furthermore, The price-to-earnings (P/E) ratio compares a company’s current stock price to its earnings per share (EPS). A lower P/E ratio relative to the company’s peers or historical average may indicate that the stock is undervalued. As well, The price-to-book (P/B) ratio compares a company’s market value (stock price) to its book value (assets minus liabilities). A P/B ratio below one may suggest that the stock is undervalued relative to its assets.
Momentum
Consistent dividend growth over time demonstrates the company’s financial strength and management’s confidence in its future earnings. Companies with a track record of increasing dividends annually are often favoured by income-oriented investors.
The payout ratio, which measures the proportion of earnings paid out as dividends, is also crucial. A sustainable payout ratio ensures that the company can continue to reinvest in its business while still rewarding shareholders with dividends.
From there, we want to see that revenue and cash flows are continuing to climb. This will help support the dividend and growth. It can also be a strong sign of more share growth and dividend increases.
A stock to consider
A company that falls right into line with these is Canadian National Railway (TSX:CNR). The industrial stock is an essential service and one of just two in Canada. It’s a premium railway line that continues to put cash aside to continue its top position.
Meanwhile, the company has a long and stable history of dividend growth. Yet despite this, along with its predictable cash flows, shares are still quite valuable. The company trades at just 20.83 times earnings. However, its P/B ratio is a bit high at 5.58.
Add to this that the stock has continued to demonstrate growth in its finances as well as dividends over the years and even decades. And with a payout ratio of just 37%, the dividend looks quite solid. Investors can now grab a 1.93% dividend yield, which is higher than its five-year average of 1.76%.
Bottom line
CNR stock is, therefore, a perfect option. The company is a stable dividend stock that can continue to fuel your dividend dream. You’ll receive a solid dividend yield that should continue to increase. This comes from stable cash flows in an area of the market cornered by this company. And that’s already been seen after the company rose in share price by 23% since last October. So, if you’re looking for income to come your way this year and beyond, consider CNR stock as a top choice.
