RRSP Investors: 2 Superior Dividend Stocks for Optimal Returns

Superior dividend stocks like the Canadian National Railway (TSX:CNR) can add income power to your portfolio.

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Are you looking for superior dividend stocks that offer the potential for high total returns?

If so, you may have to compromise on the “yield” part a little. When a company pays out an enormous percentage of its profits as dividends, it is left with little money left over to re-invest in itself, which results in either no growth or costly growth in the form of borrowing. Basically, if a company has attractive investment opportunities in front of it, it should keep the dividends to a minimum.

Nevertheless, there are stocks that offer both growth and dividends all in one package. Several Canadian companies meet this definition. In this article, I will explore two superior dividend stocks with decent yields and significant growth potential.

CN Railway

The Canadian National Railway (TSX:CNR) is Canada’s largest railroad company. Operating 31,000 kilometres of track and shipping $250 billion worth of goods each and every year, it is a pillar of the North American economy. The stock’s yield today is only 2%, but its dividend growth has been phenomenal: 13.7% per year over the last 10 years! That’s a sign of a superior dividend stock.

CN Railway is a transportation company. It ships goods like grain, timber, and crude via its vast rail network. It can reach three North American coasts via its tracks.

CN Railway has grown a lot over the years. Over the last 10 years, it compounded its revenue 4.5% and earnings by 10.2% per year – pretty respectable growth for a mature business in a 150-year-old industry.

One thing that CN Railway has going for it is a strong competitive position. It has only one major competitor, which gives it a lot of pricing power. This fact shows up in the company’s profit margins: it has a 33% net income margin, 15% free cash flow margin, and 27% return on equity (ROE).

Royal Bank of Canada

The Royal Bank of Canada (TSX:RY) is Canada’s biggest bank. It is also one of the Canadian banking sector’s most consistent performers, boasting high dividends and steady capital gains over many decades. It has paid a dividend every single year for more than 100 consecutive years!

The most recent big news item from Royal Bank was its acquisition of HSBC Canada from HSBC. This acquisition cost RY $13.5 billion and added about $400 million in net interest income. Net income in the year immediately before the deal closed was only $828 million, but RY says it can get that figure up through “synergies.”

It looks like Royal Bank overpaid for HSBC Canada. Indeed, 16.3 times earnings is an extreme multiple for a bank. Nevertheless, RY is a superior dividend stock on the whole. It boasts a 3.9% yield, 36% payout ratio, and 7.4% 10-year compounded dividend growth rate. While I’m not sure the company has the best acquisition strategy around, it does have a good dividend track record.

Superior dividend stocks: Foolish takeaway

When it comes to dividend stocks, oftentimes less is more. While high yields are tempting, usually moderately high yields combined with dividend growth pay off more in the long run. Either one of the superior dividend stocks mentioned in this article would be worth owning.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.

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