TFSA Dividend Growth: 2 Stocks With Significant Long-Term Upside

CN Rail (TSX:CNR) and another top dividend grower could deliver in the next five years.

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Tax-Free Savings Account (TFSA) investors seeking to invest for the truly long haul (at least five years, but preferably more than a decade) may wish to show more love to the dividend-growth stocks. Undoubtedly, new investors may dismiss a company’s ability to grow dividends in favour of a stock that just boasts a higher upfront dividend yield.

Why bother with dividend growth when it takes many years to drive a yield based on your invested principal to a level that’s bountiful when you can just buy a stock that yields more than 7% today?

As impressive as CN Rail (TSX:CNR) stock’s track record of dividend growth is, Enbridge (TSX:ENB) boasts a dividend yield of 7.63% right now.

Indeed, dividends paid sooner rather than later are worth more, especially in a high-rate world.

Enbridge stock: A high-yield dividend grower for those comfortable with risk

Enbridge’s impressive dividend, though completely safe in my humble opinion, is simply a larger commitment. Though the pipeline firm can balance between growth and returning cash to shareholders, it’s important to note that every dollar returned to investors in the form of a dividend is a dollar less for investing in future growth initiatives. Indeed, future earnings growth is needed to sustainably power impressive dividend growth.

Additionally, there are risks in investing in ultra-high-yielders. When it comes to Enbridge, the stock is quite a bit choppier. And the stock’s track record of capital gains isn’t as impressive. In fact, over the past five years, ENB stock has gained less than 1% at the time of writing. Indeed, dividends are great, but income investors should think about total returns, which take into account the capital gains and dividends you will receive.

Of course, Enbridge’s five-year chart is going to look far different than the road ahead for the next five years. Could Enbridge score above-average gains, dividends, and dividend growth? It’s certainly possible, especially as the industry environment improves along with management’s capabilities.

In any case, Enbridge also has a rich record of hiking dividends, even when industry conditions are less than sanguine.

CN Rail stock: Slow and steady dividend appreciation

Enbridge’s road ahead is less certain due to a wide range of factors (think regulations, industry headwinds, and all the sort) than the likes of CN Rail. Though CN Rail is sensitive to fluctuations in the economy, just like most other industrials, the railway just doesn’t have as much in the way of competition versus firms in the energy patch. Indeed, you’re not going to see a startup looking to build a network to compete with CN Rail anytime soon.

The magnitude of capital to invest in the network just does not make sense, even if rates were markedly lower from here. In essence, CN’s best investments are a barrier to entry. With not much in the way of competition when it comes to bulk transport, CN Rail can grow its earnings and sales at a steady pace. At the end of the day, wider moats mean more pricing power.

Combined with operational efficiency-driving moves, CN Rail stands out as a stock that can gain and raise dividends. The 2.1% dividend yield isn’t towering, especially compared to Enbridge. However, when it comes to the whole package, CNR stock stands out as a top TFSA stock to hold for life.

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 Joey Frenette has positions in Canadian National Railway. The Motley Fool recommends Canadian National Railway and Enbridge. The Motley Fool has a disclosure policy.

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