Canadians who want to save for retirement but do not have a company pension plan are able to use their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to build portfolios of investments to provide retirement income to complement Old Age Security (OAS) and Canada Pension Plan (CPP) pensions.
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Yield or dividend growth
Many investors only search for the highest-yielding stocks when evaluating companies for a dividend portfolio. This can result in missed opportunities as well as potential disappointment if a high-yield stock cuts its distribution.
Dividend growth is generally more important than current yield if you are planning to hold the stock for decades and intend to either reinvest the dividends in new shares or use the distributions for generating passive income. The reason is that each new dividend increase will boost the yield on the initial investment. When a company raises its dividend steadily for decades, the long-term impact can be meaningful on the total return. Stocks that consistently raise their dividends tend to drift higher over time, even if they go through periods of weakness due to economic or sector turbulence.
In the current market conditions, it makes sense to consider industry leaders with long track records of delivering steady dividend hikes.
Enbridge
Enbridge (TSX: ENB) is a dividend-growth star and offers a high dividend yield. Investors who buy ENB stock at the current price can get a yield of 5%.
The company is working on a $40 billion capital program that is expected to drive distributable cash flow up by 5% per year over the medium term. This should enable the board to deliver steady dividend increases. Enbridge raised the dividend in each of the past 31 years.
Canadian National Railway
Canadian National Railway (TSX: CNR) has also increased its dividend annually for the past three decades. The current yield is only 2.25%, but a quick look at the long-term chart of the stock shows the benefit of owning a business with a wide moat.
CN provides transportation services that are key to the smooth operation of the Canadian and U.S. economies. Rail companies do compete with each other and with trucking companies on some routes, but the rail businesses as a whole tend to enjoy wide moats and generate strong profits, even during difficult economic times.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) has increased its dividend annually for the past 26 years. This is impressive for a business that relies on commodity prices to determine margins and profits.
CNRL’s secret lies in its diversified asset portfolio as well as its strong balance sheet. The company is the sole or majority owner of most of its assets. This gives management the flexibility to move capital quickly around the portfolio to take advantage of positive movements in energy prices. CNRL also has the financial clout to make large strategic acquisitions when opportunities arise to add production and reserves at discounted prices.
The stock can be volatile, so investors need to have the patience to ride out some turbulence when energy prices drop. That being said, big pullbacks have historically proven to be good buying opportunities for patient investors. At the time of writing, CNQ stock provides a dividend yield of 4.25%.
The bottom line
Enbridge, Canadian National Railway, and Canadian Natural Resources are good examples of TSX industry leaders with strong track records of dividend growth. If you have some cash to put to work in a dividend portfolio, these stocks deserve to be on your radar.
