Not all that many dividend stocks out there are worthy of a spot in your TFSA (Tax-Free Savings Account), especially with the TSX Index sitting within a percentage point or two away from all-time highs. Not only do you need to have a fundamentally sound firm with a solid growth profile and a well-covered payout, but you also need to ensure you’re paying a somewhat fair price of admission.
With the broad markets looking to make even higher highs this summer, even after all the geopolitical shocks we’ve been through in recent quarters, investors can expect to pay a hefty premium for the most premier dividend growers. And while it’s always best to insist on the largest discount (and, with that, a wide margin of safety), investors shouldn’t be too against paying a fair price for a great stock. And in this environment, perhaps the slightest of discounts to your expectation of intrinsic value is good enough to warrant putting a good amount of money to work.
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CN Rail
CN Rail (TSX: CNR) may be an economically sensitive stock that’s been lagging far behind the rest of the market. But history suggests it doesn’t take all too long for the $90 billion railway juggernaut to shrug off its bear moments en route to some form of ricochet. Over the past five years, shares of the dividend growth gem have lagged behind the rest of the market by a wide margin, rising just 17% over the period. With shares still in a bear market (down exactly 20% from the top), the name seems as untimely as ever.
And while CNR stock’s slump could last a while longer (who knows if it’s a few quarters or another year) as seemingly worsening trade headwinds and a dip in consumer sentiment hit hard, I do think the name will, in due time, find a way to return to its TSX Index-beating ways. The stock may not be cheap at 20 times trailing price-to-earnings (P/E), but I think it’s a fair price to pay for one of the most respected dividend growers in the country.
Additionally, the 2.5% dividend yield is close to a full percentage point higher than it was when CNR stock was considered a “capital gains” play. That’s a great deal for a wide-moat dividend growth stock, at least in my books.
Big name at BMO sees value in the name
Bank of Montreal (TSX: BMO) chief investment strategist Brian Belski thinks the trade-oriented names are oversold and perhaps overdue for some outperformance moving forward. CN Rail is one of the names with a favourable rating from Belski and his team. I think he’s spot-on to stick with the rail titan as the firm looks to position itself ahead of the next big economic expansion that may very well follow some trade deals inked in the second half.
Perhaps the biggest reason to stash CNR stock away for the long haul is its multi-decade-long streak of hiking the dividend. More recently, the firm hiked its payout by 5% despite industry pressures. In good times and bad, CN Rail seems to deliver for income investors, and for that reason, it’s worth picking up even as it stays in a bear market while the TSX blasts off to new heights.
